Help Your Family With UGMA and UTMA Accounts

UGMA and UTMA accounts are called the granddaddies of college savings accounts — but they're good for other purposes too. UGMA is the Uniform Gift to Minors Act and UTMA is the Uniform Transfer to Minors Act. They're custodial accounts used to hold and protect assets for minors until they reach the age of majority in their state. They are both managed by custodians, but differ in the kinds of investments they can contain. Both are available for irrevocable gifts from parents, grandparents, relatives and friends, at any amount.

These accounts work in many ways like trusts, without the expenses and difficulties of setting them up.

Based on the child's age, a certain amount of the investment income will go untaxed, while portions may be taxed at the child's or parents' rate. Tax benefits are per child, not per account, however, so there is no benefit to creating multiple accounts to game the system.

The tax advantage to a donor can be a double-edged sword: A donor may be able to reduce income taxes by gifting income-producing assets to a child, who is likely to be in a lower tax bracket. If a parent, acting as custodian, dies before the funds are turned over to the child, the account may be taxable as part of your donor's estate.

A custodian may authorize withdrawals for a range of purposes. However, the custodian must hand over control of the assets to the child when he or she turns 18 to 21, depending on the state. The child may use the money for college, but doesn't have to. This differs from 529 plans, which are limited to higher education.

However, there's an advantage over 529 plans in that there is no limit to how much money may be put into a UGMA/UTMA account. Still, there may be gift tax and estate tax exclusion issues, so it's wise for high-net-worth families in particular to consult a financial professional.

Students who do use the UGMA/UTMA funds for college need to know that these funds are their assets, and thus may be counted against financial aid. It is expected that about 20 percent of the assets will be used to fund a student's education in any given year.

Those who are considering UGMA/UTMA funds for college should also know that although unused funds in 529 plans can be held for graduate school or transferred to a sibling, this is not possible with UGMA/UTMA. Funds not used for the child must be turned over when he or she reaches majority — the age may vary.

This is just an introduction to a complex topic. Deciding what mix of UGMA/UTMA, 529 plans and trusts are right in your situation can be difficult. Talk with a financial professional about which kinds of savings vehicles are right for you.