[1]UTMA (Uniform Transfers To Minors Act) replaced UGMA (Uniform Gifts To Minors act). In addition to gifts of securities, life insurance policies, annuities and cash, the new act also provides for gifts of other property interest, real property and titled personal property, such as automobiles and mobile homes. This act allows parents, grandparents or others to transfer assets to a custodian for the benefit of a minor child.
Unlike a trust, a custodianship is not a separate legal entity or taxpayer. The custodial property is fully vested in the minor, and any income is taxed to the minor, regardless of whether or not it is distributed. Unlike a guardian, the custodian is not accountable to a court and has broad powers over investments. Commonly, the custodian (who may be a parent) simply establishes a UTMA account at a financial institution and transfers funds to it. The income is reported under the child’s social security number on his or her tax return, and thus the tax on the income to the minor child could be at a lower tax rate than the donor. However, this depends on how the “kiddie tax” might apply to that specific minor.
Additionally no separate legal forms or trust documents are required. The custodian takes title to and holds the property for the minor’s benefit and must distribute the assets to the minor upon his or her reaching the age of majority (18-21, depending on state law.) Many potential donors consider this requirement the biggest drawback to UTMA gifts. The minor cannot withdraw any assets until he or she reaches the age of majority.
Any transfers to a UTMA are still subject to the gift tax rules. In 2014 the donor of a gift can make a gift of up to $14,000 gift tax free.
UTMA advantages:
- Simplicity
- Low costs
- Ease of administration
- Delay control to minor until age of majority
UTMA disadvantages:
- Loss of parental control over assets
- Inflexible distribution requirements – must distribute at age of majority
- Tax impact on funds used for items considered obligation of the parent
- Kiddie tax rules that can negate the opportunity for tax savings
- The prospect of the child receiving more money than he or she is capable of managing (or willing to use for the intended purposes) upon age of majority
- May affect child’s eligibility for college financial aid
If you’d like to learn more about how the UTMA can be used to hand your assets down to the next generation, please contact your ShindelRock professional.