Understanding Uniform Transfer To Minor Accounts (UTMA's)

West Essex Tribune
October 7, 2004

UTMAs are accounts at a bank, broker or mutual fund, in the name of a custodian for the benefit of a child. The custodian controls the account until the child is 21 years old. The income is taxed to the child saving taxes using to the child's lower tax brackets.

There are drawbacks to UTMAs.

First, if the custodian put assets into the UTMA or is the child's parent or legal guardian, the UTMA is included, and taxed, in the custodian's estate.

Second, when the child gets the account when they are 21 years old.

 

Third, the UTMA account is considered the child's asset and may reduce college financial aid. Fourth, it is often not clear who the successor custodian is, especially if the custodian does not have a Will naming a trustee for the child's funds. Finally, while the UTMA must be used for the child's benefit, the parents' assets, socio-economic status, and other factors may limit what the UTMA funds may be used for and what the parents must pay for.

There is no ideal alternative to UTMAs. Qualified State Tuition Plans are one option. Another is creating a trust for the child that keeps the trust assets out of the parents' and trustees' estates, and free from their creditors. The trust names trustees and back-up trustees, and may continue past the child's 21st birthday.

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