The forgotten savings vehicle, UGMA/UTMA is still a viable tool to stash away funds for k-12, college, and other expenses related to minors. Prior to 529 plans, UGMA/UTMA was the most tax efficient manner to save for college and transfer wealth to children and grandchildren. UGMA stands for The Uniform Gifts to Minors Act, and UTMA stands for The Uniform Transfers to Minors Act. They are virtually similar in all respects.
Purpose of UGMA/UTMA Accounts
A means by which children who are not of 'Age of Majority,' 18 in most states 21 in others, can own securities (stocks, mutual funds, bonds, etc.).
Control of Accounts
In establishing a UGMA/UTMA account, the individual who will be responsible for overseeing and management of the account is referred to as the 'Custodian.' The person who opens the account can differ from the individual whose name appears as the 'Custodian.' The 'Custodian' is legally bound to judiciously manage the funds in the account, meaning that they cannot use the funds to bet or gamble, for example.
Upon reaching the age of majority, the minor can then assume control over the account, even if it counter's the wishes of the 'Custodian.'
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Top FAQs on UGMA/UTMA
Can I open a 529 Plan account with the money from my child's UGMA/UTMA?
Most 529 Plans permit a custodian for a minor under the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act (UGMA/UTMA) to apply funds held in an UGMA/UTMA account to open an account in the Plan and to fund additional contributions to such an account, subject to the laws of the state under which the UGMA/UTMA account was established. You should consult with a tax advisor before transferring UGMA/UTMA assets to a 529 Plan.
Who is considered the owner of the UGMA/UTMA 529 account assets?
Most 529 Plans permit the custodian to act as the participant. The designated beneficiary does not have control of the assets in the account until the custodian informs the 529 plan that the designated beneficiary has reached the age of maturity.
Will I be able to change the designated beneficiary of this UGMA/UTMA 529 account?
A custodian participant may not select a new designated beneficiary (directly or by means of a rollover), except as permitted under UGMA/UTMA guidelines. When the custodianship terminates, the designated beneficiary is legally entitled to take control of the account and may become the participant. Additional contributions of money not previously gifted to the designated beneficiary under the UGMA/UTMA account should be made to a separate, non-custodial account, to allow the participant to retain control of the separate account after the custodianship terminates.