What are Custodial Accounts?
The most common custodial accounts were formed under the Uniform Gift to Minor’s Act (UGMA) and Uniform Transfer to Minor’s Act (UTMA) which created accounts where a custodian (parent or other adult) holds and protects assets for a minor child until they reach the age of majority in their state (21 in New York). UTMA is the successor to the UGMA and most common in almost all states.
UGMA and UTMA accounts provide an easy way to gift/transfer assets to a minor’s name. While UGMA and UTMA accounts can be used for education, this is not their sole purpose. They can be used for pre-college education and expenses or, once the minor reaches age of majority the funds can be used for anything.
These accounts allow for greater investment options than 529 college savings accounts and just about any type of security can be gifted/transferred to an UTMA and UGMA. UTMA law even allows for real estate to be transferred into the accounts.
UGMA/UTMA accounts can also provide a tax benefit for the custodian with the first $1,050 of interest, dividends, and capital gains exempt from taxes and the second $1,050 taxed at the child’s rate.
*Tax year 2016 values, subject to change each year.
The same tax benefit listed above can also make custodial accounts unattractive in that unearned income over $2,100 is fully taxed at the custodian’s tax rate for children under age 19 and full-time students under the age of 24.
Custodial accounts have a high impact on financial aid eligibility. UGMA/UTMA accounts are treated as an asset of the student on a FAFSA form and will reduce their financial aid eligibility by 20% of the value (versus 5.64% of a 529 which is listed as a parent’s assets).
Once assets are put into a UGMA/UTMA account they are owned by the child. That’s right, the assets no longer belong to the parent even though they are the custodian. If capital needs arise down the road, the custodian cannot use them for themselves, and may suffer from “UGMA/UTMA regret”.
When the child reaches age of majority they gain full control of the assets and can spend it on whatever they want. While this may be perfectly suitable for some young adults, it may be too soon for others to gain control of what could be significant financial assets.
If you specifically want your gift to be used towards the child’s college education, we recommend a 529 college savings plan. This will ensure your intention and provides greater tax benefits. If you desire flexibility and want your child to gain a greater sense of financial responsibility in life, a UGMA or UTMA account may be the right solution for you.
Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $1.8 billion.Overview
Strategic Financial Services, Inc. is a SEC-registered investment advisor. The term “registered” does not imply a certain level of skill or training. “Registered” means the company has filed the necessary documentation to maintain registration as an investment advisor with the Securities and Exchange Commission.
The information contained on this site is for informational purposes and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. Every client situation is different. Strategic manages customized portfolios that seek to properly reflect the particular risk and return objectives of each individual client. The discussion of any investments is for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments identified and described do not represent all of the investments purchased or sold for client accounts. Any representative investments discussed were selected based on a number of factors including recent company news or earnings release. The reader should not assume that an investment identified was or will be profitable. All investments contain risk and may lose value. There is no assurance that any investments identified will remain in client accounts at the time you receive this document.
Some of the material presented is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Strategic Financial Services believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
No content on this website is intended to provide tax or legal advice. You are advised to seek advice on these matters from separately retained professionals.
All index returns, unless otherwise noted, are presented as price returns and have been obtained from Bloomberg. Indices are unmanaged and cannot be purchased directly by investors.