As a parent, you want to ensure that your child has the best financial future possible. One way to do this is by setting up a custodial account, such as a UTMA or UGMA account. These accounts allow you to transfer assets to your child and are managed by a custodian until your child reaches the age of majority. However, before opening an account, it is important to understand the risks and benefits associated with these accounts. In this blog post, we will discuss everything you need to know about UTMA and UGMA accounts.
What are UTMA and UGMA accounts?
UTMA stands for Uniform Transfers to Minors Act, and UGMA stands for Uniform Gifts to Minors Act. Both of these accounts allow you to transfer assets to your child, such as cash, securities, and real estate. The assets are held in the child's name, but are managed by a custodian until the child reaches the age of majority.
UTMA accounts allow for a wider range of assets to be transferred to the child, while UGMA accounts are more limited in the types of assets that can be transferred. Additionally, UTMA accounts have a longer age limit, with the child receiving full control of the assets at age 21, while UGMA accounts typically end at age 18.
How do UTMA and UGMA accounts work?
When you open a UTMA or UGMA account, you will name a custodian to manage the account until your child reaches the age of majority. The custodian has the power to manage and invest the assets in the account, but must act in the best interest of the child.
The assets in the account are considered the child's property, and can be used for any purpose that benefits the child. This could include paying for education expenses, buying a car, or even purchasing a home. However, once the child reaches the age of majority, the assets are fully under their control and they can use them for any purpose, even if it is not in their best interest.
What are the benefits of UTMA and UGMA accounts?
One of the main benefits of UTMA and UGMA accounts is that they allow you to transfer assets to your child without the need for a trust. This can make the transfer process much simpler and less expensive.
Another benefit of these accounts is that they can help teach your child about financial responsibility. By giving them control over the assets at a young age, they can learn how to manage money and make smart financial decisions.
Finally, UTMA and UGMA accounts can provide tax benefits. While the assets in the account are considered the child's property, any income or gains generated by the assets are typically taxed at the child's lower tax rate, which can result in significant tax savings.
What are the risks of UTMA and UGMA accounts?
While UTMA and UGMA accounts offer many benefits, there are also some risks that should be considered before opening an account.
One risk is that the assets in the account are considered the child's property, and once they reach the age of majority, they can use them for any purpose, even if it is not in their best interest. This means that the child could potentially spend the assets on frivolous purchases or make poor investment decisions.
Another risk is that the assets in the account could impact your child's ability to qualify for financial aid. Since the assets are considered the child's property, they will be factored into the Free Application for Federal Student Aid (FAFSA) calculation, which could reduce the amount of financial aid they are eligible for.
Finally, UTMA and UGMA accounts can impact your child's tax situation.
For more information about qualifications and maximum contribution amounts, write us at Team@Carpe.com. We're here to help!