UTMA account – Everything you need to know about these custodial accounts

UTMA account – Everything you need to know about these custodial accounts

March 08, 2023

What is a UTMA account?

A UTMA account, or Uniform Transfer to Minors Act account, is a financial account designed to facilitate the transfer of money, property, or other valuable assets to a minor, such as a child. These assets can include items like artwork, life insurance policies, royalties, and even patents.

Why not give your child the money directly?

The reason for using a UTMA account is that children often lack the financial management skills and long-term perspective needed to handle money wisely. UTMA accounts enable a designated custodian, who can be you, a relative, a financial advisor, or someone else you appoint, to manage and invest the assets until the child reaches the age of majority. This ensures responsible stewardship of the child's resources.

Additionally, a UTMA account allows you to earmark funds specifically for your child. Without such an account or another custodial arrangement, your assets intended for your child might become part of your estate, subject to additional fees and potentially taxes upon your passing.

What are the income tax implications and benefits of a UTMA account?
While UTMA accounts offer some tax benefits, they are not a substantial tax-saving vehicle. Here's what you need to know based on 2021 tax laws:

  • The initial $1,100 in earnings within the UTMA account is tax-free, covering dividends, interest income, and capital gains.
  • The subsequent $1,100 in earnings is subject to taxation at the child's tax rate, typically 10%.
  • Earnings exceeding $2,200 are taxed at your highest marginal tax rate, potentially affecting your overall tax liability.

These tax regulations, known as "kiddie tax" rules, provide some flexibility while preventing the exploitation of tax laws by transferring assets into children's names. It's important to note that opening a UTMA account won't result in significant annual tax savings but can provide some incremental benefits.

Are there other tax implications to consider?

Contributions to a UTMA account do not offer tax benefits to the contributor, except for potential reductions in their overall tax liability. Gift tax implications come into play when gifting assets or cash exceeding $15,000 per year to a child. If this threshold is surpassed, additional IRS paperwork may be necessary. Only if you have exceeded your lifetime gifting limit would you face a gift tax of 37% on the annual gift above $15,000.

When can your child access the assets in the account?

The age at which a child can access the assets in a UTMA account varies by state and is referred to as the "age of majority." This age typically ranges from 18 to 25 years old, and it's crucial to review your state's specific age of majority before opening a UTMA account.

The "age of majority" does not restrict your ability to use the funds in the account for your child's benefit. You can spend the money from the UTMA account, provided you can demonstrate that the expenditure directly benefits your child. For instance, you can use the funds for K-12 private school expenses. However, you cannot use the money for typical parental expenses like clothing, mortgage or rent payments, and groceries. It's essential to be aware of potential legal consequences, as some parents have faced issues when improperly using their child's UTMA funds.

Once you contribute to a UTMA account, can you reclaim the assets?

No, once you transfer assets into your child's UTMA account, there is no way to reverse the transfer. Therefore, it's crucial to carefully consider your decision and ensure that you do not require those assets for your own use before making the transfer.