What are UGMA/UTMAs and do I need one for my child?

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What are UGMA/UTMAs and do I need one for my child?

Transferring financial securities to your kids for college can get tangled in all sorts of legal strings when they are still minors. Minors in most states do not have the right to make contracts; which blocks them from owning stocks, bonds, mutual funds, life insurance policies, and annuities.

But if you’d like to transfer this type of asset to your children without the hassle and expense of a complex trust arrangement, you can use a Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) custodial account.

Uniform Gift to Minors Act (UGMA) Account: An UGMA account lets minors own securities according to rules laid out in state statutes, rather than requiring the creation of a customized, individual trust.

Uniform Transfer to Minors Act (UTMA) Account: An UTMA account is similar but allows minors to own property such as fine art and real estate.

Essentially, both of these accounts are ways of making an irrevocable gift to a minor, which then belongs to the child but is controlled by a custodian until the child reaches 18 or 21 (depending on state law).

Planning for college?

UGMA/UTMA accounts are a great way to protect and save money for college expenses, but take heed: While you might prefer the money to be used for college expenses, the law does not permit any restrictions on how it can be used.

Once your child gains control of the account or asset, they’re free to use it any way they see fit—something you may, or may not, be comfortable with.

How do you go about setting up a UGMA or UTMA?

Trusts protect and direct your money in all sorts of helpful ways. PenFed can help you establish a custodial trust account, as well as several other types of trust arrangements.

Let us help you plan ahead!

Posted in: Personal Finance, Saving Money
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