How do UTMA accounts work?

This custodial account can hold a wide variety of assets on behalf of a minor.

Elissa

Elissa Suh

Published November 3, 2020

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KEY TAKEAWAYS

  • 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:

How does an UTMA account work?

An UTMA account is easy to open and straightforward to use.

  • 1. An adult opens the UTMA account and contributes to it on behalf of a minor beneficiary.
  • 2. The custodian manages the account until the minor comes of age.
  • 3. All UTMA account assets transfer to the beneficiary.

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.

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UTMA vs UGMA

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.

Transferring an UTMA account

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.

You can check out this artice on age of majority for UTMA account to find your state.

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.)

What can UTMA funds be used for?

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.

Saving for college with UTMA accounts

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.

How is an UTMA account taxed?

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:

IncomeTax rate
Under $2,60010%
$2,601 to $9,30024% on the amount over $2,600 plus $260
$9,301 to $12,75035% on the amount over $9,300 plus $1,868
Over $12,75037% 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.

Gift tax

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 and will remain $15,000 in 2021. 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.

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Personal Finance Editor

Elissa Suh

Personal Finance Editor

Elissa is a personal finance editor at Policygenius in New York City. She writes about estate planning, mortgages, and occasionally health insurance. In the past she has written about film and music.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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