When you mention that you want to save for your child’s future, the most common suggestion is to open a 529 account. However, there are other options outside of college savings vehicles.
If you’ve already contributed the maximum to a 529 or want to explore other, non-educational account options, consider a UTMA account. This type of saving vehicle provides a unique opportunity to invest for your child’s future with money or property that isn’t earmarked for a specific purpose.
UTMA Account Basics
A Uniform Transfers to Minors Act [UTMA] account allows parents, grandparents, or other loved ones to give gifts to a child. The money or property given to the child is overseen by a responsible adult called the custodian. This individual has a fiduciary duty to manage and invest the account on behalf of the child until they reach adulthood.
Once the child reaches adulthood, they can claim the assets and transfer them to an individually owned brokerage account. The age at which the minor can claim the assets varies by state but is generally between 18 and 25 years old.
Investments Allowed in A UTMA Account
The UTMA structure is a modification of the older Uniform Gifts to Minors Act [UGMA] account type which was only able to hold monetary assets like stocks, bonds, and mutual funds. On the other hand, a UTMA account is much more flexible and can hold monetary assets as well as physical assets like real estate, jewelry, art, and other property.
Some of the types of assets allowed in a UTMA account include:
- Cash
- Stocks
- Bonds
- Patents
- Royalties
- Real Estate
- Fine Art
- Mutual Funds
- Intellectual Property
The variety of investments allowed in UTMA accounts make them popular choices for transferring property to minors without needing to establish a trust. They are also used to move assets that otherwise would have been inherited prior to their death of the original owner.
Taxes And UTMA Accounts
There are two types of taxes that could be owed with a UTMA account. First, the contribution could be subject to gift tax. Second, the earnings on the account could be subject to income tax. The applicability of each type of tax depends on the individual situation of the giver or receiver of the funds.
Individuals can avoid gift tax on contributions to a UTMA account by utilizing the annual gift tax exclusion. This provision of the tax code allows an individual to give up to $19,000 or a couple to give up to $38,000 per year to another person without triggering gift tax. For gifts above this limit, it is wise to consult a qualified financial professional to discuss how the gift could impact the lifetime exclusion amount.
Once the money or property is given to the minor, it is also subject to special income tax rules – colloquially known as the “kiddie tax.” Depending on the amount of earnings, they could be tax-free, taxed at the child’s tax rate, or taxed at the parent’s tax rate.
Considerations When Planning Gifts for Children
A UTMA may be the right choice if you are saving for your child’s future, but there are several factors you need to consider before choosing the right type of account for your situation. First, determine if you need the ability to reclaim the funds or redistribute them to another child if they are not used. Gifts placed in a UTMA account are irrevocable while other types of accounts have more lenient rules.
Second, consider the intended use of the funds. If you are planning for your child’s college, a specialized account may provide tax incentives to fund this goal. On the other hand, if you are not planning for educational expenses, a UTMA account could provide flexibility in how the funds are used.
Third, consider the investment options and who will manage the account. A UTMA provides a vast selection of investment options along with the ability to name a custodian to manage the funds. Other types of accounts have more limited investment options and may have a narrower definition of who can manage the funds.
As you consider these factors, it is wise to discuss your needs with an experienced wealth manager. This person should have knowledge of the various types of accounts that you can use to prepare for your child’s future and help you weigh the pros and cons of each.
Plan For a Successful Future for Your Child with DreamWork
At DreamWork Financial Group, we aim to make your financial dreams come true – including a successful future for your child. If you are looking for ways to save for your child, we can help you evaluate the options and choose the right one for your situation.
Once you have chosen an account type, we can also help you make wise investment choices through our proprietary wealth management system, Investing Gameplan™. It includes a completely custom portfolio created and managed by a local, fiduciary advisor. You may think this level of personalization is only for the very wealthy, but with DreamWork, You Don’t Have to Be Wealthy to Have Wealth Management®.
To learn more about Investing Gameplan™ and get started saving for your child’s future, contact us today.