Parents typically open custodial accounts if they want their children to save and invest because children in most states are not legally allowed to own financial assets. UTMA is one of the most common form of a custodial account. For a custodian to be allowed to hold assets on behalf of a minor child until the child reaches the age of majority which is typically 18 or 21, many states authorize them through the legal provision called UTMA which stands for Uniform Transfers to Minor Act. A fiduciary duty on the custodian to hold the asset on the minor’s behalf is also imposed by the UTMA although the custodian has legal possession of the minor’s assets in a UTMA account. And for tax purposes, the account is not treated as the custodian’s but the minor’s, which has its advantages.
The fact that you are holding the assets as a custodian for the minor child will reflect on the ownership of the UTMA account when you open one. A typical UTMA account would usually be registered like this: Jane Doe, custodian for benefit of John Doe, UTMA.” In the account title, the name of the state whose specific UTMA laws are used is also included.
You have broadened powers to manage the assets on behalf of the minor child once you have established the UTMA account as the custodian. As long as you deem prudent for the child’s best interest, you can make investments, transfer assets across different UTMA accounts, and buy and sell securities.
The minor child is treated as the owner of the UTMA account for tax purposes. The account will bear the Social Security number of the child although the parent is the custodian.
If the child’s tax rate is lower than the parent’s tax rate that can be advantageous since it will lead to lower overall tax liability. However, to prevent the usage of UTMA as a means of obtaining favourable tax rates, IRS provisions limit its usage.
When UTMA custodians spend money from UTMA accounts, they sometimes get into trouble because of that. The custodian’s money is not allowed to be commingled with the UTMA money. In addition, to satisfy the legal obligations of the minor child’s parents, UTMA money can’t be used. Since it is critical to separate legal obligations from supplemental support, this is very important especially if the parent is also the custodian. For example, parents should not tap UTMA accounts to pay for the legal requirements that they must provide for children such as food and shelter.
This doesn’t mean UTMA money can’t be used by parents for anything. In general, on the child’s behalf, the custodians have broad discretion to spend it. Items that fall under permissible expenditures are paying for a vehicle, tuition costs for a private school, or camp fees. Since the parent can document that the UTMA account is not the sole source of support, it is generally smart to use UTMA money as a supplement to their own contribution toward their minor child’s expenses.
As a way to manage, hold, and invest a child’s assets, UTMA accounts can be extremely useful. To prevent having regrets later on because of the financial move you made, you need to be aware of the limitations of a UTMA arrangement before opening a custodial account.
The maturity time is the difference between UTMA and UGMA. At 18 years the UGMA matures while up to 25 years, the UTMA is allowed to mature before it is handed to the beneficiary.
They each also have a different termination date. The termination age for UTMA is 21 while UGMA termination is at 18 years. Further, UTMA accounts only allow the donation of basic assets while UGMA accounts allow parents to donate gifts such as stocks, money, or life insurance.
