Do you want to set some money aside for your child? There are several ways to help set your child up for a strong financial future. If a 529 college savings plan isn’t ideal because you aren’t sure if your child will go to college, then you may want to look into Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA). These are two types of custodial accounts that parents and others can use to give financial gifts to minors. They are quite similar but there are a few differences that are important to know. We will discuss both UGMA and UTMA in detail to help you make an informed decision about which account to choose to set your child up for a bright future.
UGMA vs UTMA overview
The UGMA and UTMA are custodial accounts that an adult, known as the custodian, can set up for minors. The custodian and other adults can contribute to the account until the child gains full control. The account can grow quite considerably during a child’s life due to compound interest. This can help set your loved one up for their future goals.
A contribution to a custodial account is irrevocable. This means that the contribution can never be taken back as it becomes the property of the minor recipient. Once the minor reaches 18 or 21, depending on the state that you live in, the child gains full control of the account and everything associated with it. The custodian cannot tell the minor how they should spend the money. Once the minor has full ownership of the account, then they can choose to do whatever they want with the assets. For some parents, this isn’t a problem, but for others, if you want to have full control over how the money is spent, then a UGMA or UTMA may not be the best option for you.
While all of the funds belong to the minor, as his/her parent, you can withdraw money for legitimate expenses that benefit your child. Any earnings within the account such as interest are considered unearned income for the minor. This will be taxed at the child’s tax rate.
What is the difference between a UGMA and a UTMA account?
The main difference between a UGMA and a UTMA is the asset makeup of the account. The UGMA contains only financial products such as stocks, bonds, and mutual funds. A UTMA can have financial assets and physical assets. Some physical assets include real estate, jewelry, and fine art. You could set up a trust to leave physical assets for your loved ones but a UTMA might be a better option if you don’t want to go through the process of setting up a trust.
The second difference is related to state adoption. A UGMA and a UTMA are governed by two separate laws. The UGMA was passed in 1956 and revised in 1966. All states have adopted the UGMA allowing parents nationwide to use these accounts.
The UTMA started 30 years later. Vermont and South Carolina do not allow UTMA accounts. The state you reside in also sets most of the terms for UGMA and UTMA accounts.