Find The Best Insurance
We make it easy to compare and buy insurance.LEARN MORE
This custodial account can hold a wide variety of assets on behalf of a minor.
A minor can hold assets through an UTMA account
A custodian manages the account until the minor turns 18 or 21
UTMA accounts are newer, expanded versions of UGMA accounts
UTMA accounts are not affected by parent’s tax situation, but they are subject to the tax rates for estates and trusts
A minor cannot typically receive any assets under the law. If you were planning to leave money or an inheritance to your child as part of an estate plan, you might consider opening an UTMA account.
The Uniform Transfers to Minors Act (UTMA) allows an adult to transfer assets to a minor by opening a custodial account. This type of account is managed by an adult — the custodian — who holds onto the assets until the minor reaches a certain age, usually 18 or 21.
The benefit of an UTMA account is that you can transfer assets to a child without creating a trust, which could be more challenging and expensive to open. We’ll discuss how an UTMA account works, what the funds can be used for, and how these accounts are taxed.
In this article:
An UTMA account is easy to open and straightforward to use.
UTMA accounts can invest in typical securities, like stocks, bonds, mutual funds, and ETFs. They can also hold life insurance policies and real estate property, as well as other alternative assets like fine art.
The custodian is responsible for managing the UTMA account, similar to how a trustee manages a trust. The custodian can be the donor (the person who opened or donated to the account), another adult, or a financial institution.
UTMA expands upon an older law called the Uniform Gifts to Minors Act (UGMA), which restricted the types of assets the account could hold. Each state sets their own inheritance laws — all states but one (South Carolina) have replaced their UGMA statutes with UTMA ones.
Generally, the UTMA account transfers to the beneficiary when he or she becomes a legal adult, which is usually 18 or 21. However, the age of adulthood may be defined differently for custodial accounts, like UTMAs or 529 plans, depending on your state. (In a few cases, you may see this referred to as the age of trust termination.)
For example, in New York a child becomes a legal adult at age 18, but for custodial accounts the age of legal adulthood is 21.
In some states, you may be able to extend the custodian’s control for a few more years and delay the age at which the child receives the assets. (If you want more control over when a beneficiary receives assets then you might consider a trust, which can be tailored to meet your needs.)
The custodian can spend or invest the money in the UTMA account at their discretion, as long as it’s for the minor’s benefit. This covers a wide range of expenses, including education, transportation, and extracurricular activities like music lessons or summer camp.
Many people might consider an UTMA account to help save for their child’s higher education expenses. However, UTMA accounts do not let you control how the beneficiary might use the funds once they become an adult. That means if you opened an UTMA account for your child to help save for college, there is nothing stopping him from using the money on something else once he has access to the funds.
Additionally, if your child is applying for federal financial aid, the money in the UTMA account will count against them, making it harder to qualify for assistance.
As you think about your estate plan, make sure life insurance is a part of it.
Policygenius can help you choose a policy that protects your family and fits your budget.
UTMA accounts have a few tax implications. While there are no taxes on withdrawals (since contributions are made with after-tax dollars), there may be taxes on any unearned income. Unearned income includes taxable interest, dividends, and capital gains on any assets in the account.
Since the passage of the Tax Cuts and Jobs Act in 2017, a minor’s unearned income over $2,100 is taxed at the rate of estates and trusts. This is sometimes called the “kiddie tax.”
The 2020 tax brackets for estates and trusts are:
|$2,601 to $9,300||24% on the amount over $2,600 plus $260|
|$9,301 to $12,750||35% on the amount over $9,300 plus $1,868|
|Over $12,750||37% on the amount over $12,750 plus $3,075.50|
Depending on the circumstances, like if the child is a full-time student, parents might be able to claim their child’s income on their own tax return. Sometimes this might result in a higher tax burden. If you have tax concerns, you might consult with a tax advisor who better understands your situation.
Prior to the Tax Cuts and Jobs Act, UTMA accounts were taxed differently. A portion of earnings were subject to income tax at the child’s tax rate (often zero) and then additional earnings were taxed at the parent’s rate.
When someone gives a gift to someone else during the year, they may have to pay taxes if the gift exceeds the gift tax exclusion. The gift tax exclusion is $15,000 in 2020. Any contributions you make over this limit — including contributions to an UTMA account — are subject to the gift tax.
Furthermore, the gift could count towards the estate tax exemption and make it more likely that your estate will have to pay taxes.
Was this article helpful?
Security you can trust
Yes, we have to include some legalese down here. Read it larger on our legal page. Policygenius Inc. (“Policygenius”) is a licensed independent insurance broker. Policygenius does not underwrite any insurance policy described on this website. The information provided on this site has been developed by Policygenius for general informational and educational purposes. We do our best efforts to ensure that this information is up-to-date and accurate. Any insurance policy premium quotes or ranges displayed are non-binding. The final insurance policy premium for any policy is determined by the underwriting insurance company following application. Savings are estimated by comparing the highest and lowest price for a shopper in a given health class. For example: for a 30-year old non-smoker male in South Carolina with excellent health and a preferred plus health class, comparing quotes for a $500,000, 20-year term life policy, the price difference between the lowest and highest quotes is 60%. For that same shopper in New York, the price difference is 40%. Rates are subject to change and are valid as of 2/17/17.
Copyright Policygenius © 2014-2020