When it comes to gifting money to children, parents have a few different options. One popular option is the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account. These accounts are created under state law and allow parents or other adults to gift money or assets to a minor child. The account’s custodian manages the funds and the gifts or transfers are irrevocable.
UGMA accounts are limited to financial products such as cash, stocks, mutual funds, bonds, other securitized instruments, and insurance policies. UTMA accounts can also hold any property, including real estate. The details of the recipient’s dependency status and income define how UGMA and UTMA accounts are taxed. However, in many cases, any returns in the account are taxed at the recipient’s tax rate.
UGMA / UTMA saving accounts offer flexibility in spending money. The child can use the funds for any purpose they choose once they reach the age of majority (18 or 21, depending on the state). This can be an excellent option for parents who want their children to have financial independence when they reach adulthood.
However, there are also some disadvantages to using UGMA / UTMA accounts. First, these accounts can be expensive to maintain due to annual fees charged by the custodian bank or institution. Second, since these accounts are irrevocable, the money may not be available if something happens to the child and you need access to the funds in the account. Lastly, when the child reaches adulthood and takes control of the account, they become fully responsible for any taxes owed on the account’s earnings.
Author
Isaac is a Fee-Only (no products sold) Certified Financial Planner® Practitioner. Isaac founded Stalwart Financial Planning with offices in Fayetteville NC and Durham NC. Isaac provides comprehensive planning and investment management services to individuals from all walks of life. Isaac can be reached by phone at 910-867-8464, or by email (iallen@StalwartPlanning.com). Visit him at Stawart Financial Planning www.StalwartPlanning.com.