UGMA and UTMA Accounts - Transferring Gifts to Minors

A Simpler Way to Transfer Assets to Help Pay for College

UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts can be used to help parents accumulate significant amounts of money to help pay for their children’s college education. These are basically custodial accounts which are used to transfer certain assets to children who otherwise would not be old enough to own them. They were originally created because most states do not grant minors the right to become a party to a contract before they reach the age of majority.

This means they cannot own most forms of investment such as stocks and bonds, annuities, mutual funds, or life insurance.

Parents who wanted to transfer control of these assets for college education and tax advantage purposes found that there was no simplified way to do so. The Uniform Gifts to Minors Act provided a way to establish an account where the terms of the trust are driven by a state statute, and not individual trust documents. Therefore, the services of an attorney or court-appointed trustee are not usually required to draft the necessary documents. The Uniform Transfers to Minors Act was enacted to allow for transfers of other types of property, such as art, real estate, patents and royalties through inheritance.

While UGMA and UTMA accounts were not specifically designed to help save for college, many families started using them for this purpose since they provide certain tax benefits.

Because the transferred assets are considered the property of the minor, these accounts can take advantage of the “Kiddie Tax” which allows a certain amount of a minor’s income to go untaxed, and an equal amount to be taxed at the child’s tax rate, which should be significantly lower than the parents’ tax rate.

The total amount is then available when the minor reaches the age of majority which is usually right around the time the student attends college. Here are some things to consider if you are thinking about transferring assets to your child now to help pay for college in the future:

  • Make sure this is what you really want to do: Despite their benefits, there are strict rules about how the money may be used and at what age it must be completely turned over to the child. Even if your child decides not to attend college, the funds will still be transferred. If you don’t think your student will be able to properly manage these funds, it might be better to utilize a regular trust account where you can maintain more control.
  • Check your state’s statutes: Not all states have this option available, and those that do have different statutes affecting their implementation. Check the rules of your home state to be sure you are comfortable with all its provisions before investing in this type of account.
  • Others can donate: Since many people can donate to this type of account it can be less complicated than having each party set up a separate type of investment. In this way parents, grandparents, aunts and uncles, other relatives and even friends can help support the child’s future education. Watch out for any potential gift tax consequences, and keep in mind that these are irrevocable transfers so you will not be able to change your mind at some point in the future.
  • Be careful about your custodian: If the person acting as custodian dies before the child reaches the age of majority, the assets of the trust may be taxable as part of the custodian’s estate. It might be wise to consider naming a bank or other independent party as custodian.
  • Consider financial aid implications: Funds may be spent before college because having a transfer of assets hit just as a student is filing the FAFSA could negatively affect the amount of financial aid available. Some parents may choose to simply continue investing in their own names, take the tax hit for a few years, and then gift the money directly to the student in smaller amounts during college to pay for expenses or after college to help pay off their student loans.

Also Known As: ugma, custodial accounts, kiddie tax accounts, kid's accounts, college accounts

Alternate Spellings: uht-muh