Why Open an UTMA For Your Child?
An UTMA, Uniform Transfers to Minors Act, (or UGMA, Uniform Gifts to Minors Act) is a way of transferring wealth to your child. Since minors can’t hold assets, you act as the custodian of the assets. You’ll continue to manage the account until your kid reaches the age of majority. The age of majority is typically 18 or 21 depending on which state you reside. Investment income (dividends, interest or earnings) is considered the child’s unearned income. As of 2021, if the child is younger than 18, the first $1,100 of unearned income is untaxed and the next $1,100 is taxed at the child’s rate. Anything over $2,200 is taxed at the parent’s rate.
Meanwhile, this account can be invested and distributed for anything that benefits that child. This could be for music lessons or summer camps, and unlike a 529 Plan, it doesn’t have to be education-related. The only restriction is that it can’t be used for basic living expenses. Gifts made to the UTMA can also be kept in the account to accumulate for a future home down payment or just setting up your kid with a nest egg as they start their life as an adult.
Since these are assets held in your child’s name, it will impact financial aid eligibility since a child’s assets weigh more heavily than a parent’s assets or a 529 Plan. For that reason, it may not make sense to put a significant amount of money in an UTMA if you need financial aid.
One hitch that makes parents leery of opening an UTMA is thinking about whether their 18-year-old or 21-year-old can handle an account with any significant money. Would they blow it on something frivolous versus what you intended? That is a valid concern because once they become an adult, the account is theirs to do as they like.
The best thing you can do for your child before he or she oversees their wealth is to teach them the financial education they’ll need to know over the years. Start discussing financial concepts, budgeting and setting goals. Give them an ETF or mutual fund to follow to get them interested in the market and learn about types of investments. Your guidance will help them in managing their account when the time comes. Also, help them understand your intent in giving the gift. If you aren’t articulating what you hope they’ll use it for, they’ll never know. You can’t control what they do with the money, but with your help, they’ll make smart financial decisions!