Overview of UGMA and UTMA Custodial Accounts:UGMA / UTMA accounts are considered the granddaddy of college savings accounts. Before Section 529 plans and Coverdell ESA’s, parents were successfully using these accounts to accumulate significant amounts of money for their children’s college.
The UGMA (Uniform Gift to Minor’s Act) and UTMA (Uniform Transfer to Minor’s Act) are nothing more than custodial accounts. A custodial account is used to hold and protect assets for a minor until they reach the age of majority in their state.
Because the assets are considered the property of the minor, these accounts are often used to take advantage of the “kiddie tax.” The kiddie tax 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 (as opposed to mom and dad’s rate).
Ideal Investor:A custodial account is ideal for a parent or grandparent who:
- Isn’t worried about the assets going to the child if unused.
- May want to use the money for pre-college education or expenses.
- Wants greater investment options than a Section 529 account.
- Isn’t worried about getting “needs” based financial aid.
- Wants to lower their taxes on a couple thousand dollars in annual investment income.
- Wants to lower their eventual estate by using their annual gift tax exclusion.