We recently onboarded a new client that was interested in saving money for his children using an UTMA account. He was familiar with 529 College Savings Plans, but wanted another option for his children to access funds during adulthood if they didn’t need the money for college education. We recommended an UTMA account to help him accomplish his planning goals. But exactly what is an UTMA account and what do those four letters stand for?
UTMA stands for Uniform Transfers to Minors Act, a legal framework that allows adults to transfer assets to minors without establishing a formal trust. These accounts offer a straightforward way to pass down financial resources to young individuals, providing them with a head start in managing their wealth. One of the key features of UTMA accounts is their flexibility. They can hold various types of assets, including cash, stocks, bonds, real estate, and even valuable collectibles. This versatility allows contributors to tailor the account to fit the needs and preferences of the minor recipient.
Opening a UTMA account is relatively simple. A custodian, typically a parent or guardian, establishes the account on behalf of the minor. The custodian manages the assets until the minor reaches the age of majority, which varies by state but is usually 18 or 21 years old. During this time, the custodian has a fiduciary duty to manage the assets prudently for the minor’s benefit.
One significant advantage of UTMA accounts is the potential tax benefits they offer. While contributions to the account are made with after-tax dollars, any investment growth or income generated within the account is typically taxed at the minor’s lower tax rate. This tax advantage can result in substantial savings over time, allowing the assets to grow more efficiently.
UTMA accounts also provide a valuable opportunity for teaching financial responsibility. By involving minors in the management of their UTMA accounts, custodians can impart essential lessons about saving, investing, and budgeting. This hands-on experience lays the groundwork for sound financial habits that can last a lifetime.
However, it’s essential to consider the potential drawbacks of UTMA accounts as well. Once the minor reaches the age of majority (which is 21 in Tennessee), they gain full control of the assets in the account. While this autonomy can be empowering, it also means that the minor can use the funds for any purpose, regardless of the custodian’s intentions. Additionally, UTMA assets may affect the minor’s eligibility for financial aid when applying for college. UTMA accounts offer a valuable opportunity to provide financial security and education for minors. By leveraging the flexibility, tax advantages, and educational potential of these accounts, custodians can empower young individuals to take control of their financial futures and build a solid foundation for long-term success.
This is yet another tool that we offer in our Purpose-Built Planning toolbox to help our clients achieve their financial goals and dreams. If you’d like to learn more, check out our website or give us a call.
