The acronym “UTMA” stands for the Uniform Transfers to Minors Act that was enacted in 1986. It is an extension of the Uniform Gifts to Minors Act (UGMA) that was developed in 1956 and updated 10 years later.
These legislative measures give you the ability to contribute into custodial accounts for minors. You would name a custodian to manage the account for the beneficiary until they reach the age of majority.
While it is possible for you as the contributor to assume the custodian role, you could name someone else if longevity is a source of concern.
What’s the Difference Between UGMA and UTMA Accounts?
There is just one significant difference between the two types of accounts, and in fact, the terms are often used interchangeably.
The Uniform Gifts to Minors Act places restrictions on the types of assets that can be held in the account. You can only give gifts of cash or securities, but a broader class of assets can be contributed into UTMA accounts, including real property and collectibles.
From a tax perspective, there is a benefit, because the earnings are taxed at the child beneficiary’s rate.
For children under the age of majority, there is no tax on the first $1050 in earnings, and the second $1050 would be taxed at the child’s tax rate. Earnings that exceed $2100 would be taxed at the parents’ tax rate.
College Financial Aid Implications
The assets would be the property of the child, not the parents, so they could impact the child’s college financial aid eligibility. Under the guidelines, a student must contribute up to 35 percent of their assets toward the cost of their education.
If you are creating an account to pay for college expenses, you may want to use a 529 account, because the assets would be parental assets for student aid purposes. A parent is only expected to contribute a maximum of 5.6 percent of their assets.
Age of Majority
The age at which the child would assume control of the account depends on the type of account and the laws of the state. In Ohio, the age of majority is 18 for UGMA accounts, and it is 21 for UTMA accounts.
Trusts for Minor Children
You could choose to use a trust to leave an inheritance to a child, and a testamentary trust is one possibility. This is a trust that is contained within the terms of a will. If you create a testamentary trust, the executor would establish the trust for the benefit of the child after your death.
With a revocable living trust, you would act as the trustee while you are alive, so you would have access to the resources every step of the way. In the trust declaration, you would name a successor trustee, and you can name a minor child as the beneficiary if you choose to do so.
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