Building Wealth for Children: UGMA and UTMA Accounts
Updated: Sep 30, 2021
It is so important that parents teach their children about the importance of financial literacy. Opening a custodial account for your child is a great way to help your child have a successful financial future. The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) are two custodial accounts a parent, or any adult, can establish for a child. This article will explain the benefits, similarities, and differences between the two custodial accounts.
UGMA vs UTMA
The UGMA and UTMA are both irrevocable financial accounts an adult can use to buy financial assets such as stocks, index funds, bonds, or exchange traded funds for a minor child. It is important to understand that the financial assets held in these accounts are owned by the minor child, not the custodian. The custodian must be an adult and has a fiduciary duty to fund these accounts and pick the assets that are held in these accounts. At the age of majority, usually 18 or 21 depending on the state, the child will have full control of the specific account. As mentioned before, both accounts allow financial assets to be held within them. However, the UGMA is limited to only financial assets such as stocks, index funds, bonds, or exchange traded funds. In contrast, the UTMA can hold real estate.
Tax Implications to Consider
There are tax implications an adult should consider before opening a UTMA or UGMA for a child. These custodial accounts are subject to what is called kiddie tax. If the yearly unearned income the child receives within one of these accounts such as the dividends, interests, and capital gains is $1050 or under, the unearned income is completely tax free. The next $1050 is taxed at the child’s rate. Further, if the yearly unearned income exceeds $2200, then it is taxed at the custodian’s rate. These rates are always subject to change.
How the UGMA and UTMA Can Affect Financial Aid?
It is important to understand that these custodial accounts are considered assets of a child. Therefore, when a child applies for federal financial aid in the future for college purposes, these accounts will be taken in consideration and can dictate the amount of financial aid awarded. This is very important to take in consideration before opening one of these accounts for a minor child.
Establishing a UTMA or UGMA for a minor child is quite simple and can be opened online with any major financial brokerage house. Parents (or any adult) can use these accounts to acquire assets for their children, which can help them have a successful financial future. Building wealth is essential in life and is much easier to obtain if started early in life. Be influential in your child’s financial success.