Prior to 529 plans, the Uniform Gifts for Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA) were the most tax efficient ways to save for college and transfer wealth to children and grandchildren.

UGMA and UTMA are virtually similar in all respects.

Purpose | Control | Tax Implications

Purpose

A means by which children who are not of "age of majority," age 18 in most states 21 in others, can own securities (stocks, mutual funds, bonds, etc.).

Control of Accounts

In establishing an UGMA/UTMA account, the individual who will be responsible for overseeing and management of the account is referred to as the "custodian." The person who opens the account can differ from the individual whose name appears as the custodian. The custodian is legally bound to judiciously manage the funds in the UGMA/UTMA account, meaning that they cannot use the funds to bet or gamble, for example.

Upon reaching the age of majority, the minor can then assume control over the account, even if disagrees with the wishes of the custodian.

Tax Implications

• UGMA/UTMA is subject to the $12,000 Gift Tax Exclusion that allows an individual to give up to $12,000 per year to another person without being subjected to the Gift Tax.
• The first $850 in earnings each year is free from federal taxes and the next $850 is taxed at the child's tax rate. Afterwards, earnings are taxed at the normal rates.
• UGMA/UTMA accounts can be rolled over into 529 plans, which is a very common occurrence considering the more generous tax benefits and account ownership flexibility.

back to top ^