The Uniform Transfers to Minors Act (UTMA) is an extension to the already existing legislation known as the Uniform Gifts to Minors Act. However, the UTMA provides additional value to a custodian account setup under the act by considering assets other than cash and securities as gifts given to a minor named as the beneficiary of the custodian account. Therefore, it allows parents to transfer real estate, fine art, antiques, patents, and even royalties as gift assets to a minor.
Basic concept of a UTMA account:
The UTMA allows anyone to gift assets to minors (usually considered as below the age of 18 or 21) under the custodianship of the person gifting (donor) or a person named by the donor. However, the transferred assets into a custodian account will legally belong to the child although they cannot utilize the assets by themselves until they reach the appropriate age.
Advantages of UTMA:
One of the main advantages for parents hoping to transfer their assets to a child is the saving that they will be making through the use of a UTMA account which avoids the necessity to establish a separate trust. The establishment of a separate trust will require recruiting a lawyer and undergoing complex documentation processes which can sometimes be overwhelming in view of the effort as well on the expense involved. However, the UTMA account enables the automatic designation of the gift property in a trust without much effort.
Another advantage of having a UTMA account is the potential tax benefits for the parents. As the earnings on the investments are reported under the child’s social security number, the amount will be taxed at a lower rate. Thus, more investment will remain than being taxed and transferred back into the government coffers.
Apart from the above advantages, UTMA accounts will also provide the donor with ample opportunity to invest without having to worry about earning restrictions. With the added advantage of being easy to start, UTMA is definitely an attractive option for the concerned parents who want to do their best for the child’s future.
Disadvantages of UTMA:
One of the disadvantages of having a UTMA is the potential loss of financial aid due for a child through their colleges and universities as they usually consider the value of these accounts when determining the child’s eligibility towards financial aid.
Another downside of UTMA accounts is the child’s ability to make use of the assets or money for whatever purpose he she wishes and at times these uses may not benefit the beneficiary and could be a waste of investment. Thus, inability to determine the maturity and the responsibility of the child before allowing them the right to handle the money could be a concern for many parents.
Before starting a custodian account under the UTMA, one need to understand that the assets put into the account cannot be revoked for any reason. Thus, if the child after becoming eligible to withdraw decide on making use of the money for a purpose other than the ones intended by the donor, there is no legal covering provided for the donor to revoke the assets.
Lastly, it is also worth knowing that withdrawals done from the custodian account for the benefit of the child is taxable and care should be taken in planning such withdrawals to minimize the loss.