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UTMAs and UGMAs

We discussed education planning in last week’s post. What if you don’t think your child is college material? Well, some of the planning tools mentioned above can be used for trade schools and other professional programs that aren’t university related. Other options exist that enable parents to save for their children’s future.

The Uniform Gift to Minors Act (“UGMA”) and the Uniform Transfers to Minors Act (“UTMA”) allow parents the option to put assets in a custodial account for a child. There are some limitations with these types of accounts compared to the other options we’ve discussed thus far.

  1. Each account can only be assigned to one child and cannot be transferred to another sibling or family member.
  2. A portion of the child’s unearned income (i.e., interest and dividends) may be taxed at the trust income tax rate.
  3. When the child attains the age of majority as determined by the state law, the child may access the funds in the account, and is not required to use the account to pay for a college education.

While the parent establishes and funds the account, the child is considered the owner of the assets within the account. For those parents who wish to exert more control, a revocable trust could be established which provides the grantor (i.e., the parents) substantially greater control over when the funds are disbursed and how the funds are used. This of course, is a more expensive option.