Kids story

There are two types of custodial bank accounts that you may use to assist your kid in growing wealth: UTMAs and UGMAs

  • A UTMA or UGMA is a financial account that is legally your child’s to invest in.
  • Spending money from a UTMA/UGMA is not restricted in any way.
  • A UGMA may be used to invest in the stock market, but it can also hold tangible assets like a home.

To ensure that your child’s future is secure, you may consider opening a custodial account under the UTMA or UGMA (Uniform Transfer and Gift to Minors Act).

To see your child’s savings grow, create a UTMA or UGMA account. As with a 529 plan, your kid may use the funds to pay for college, but they can also use the money to pay for non-educational needs.

When in doubt, consult with close relatives and friends.

If any of the following apply to you:

  • Still want to prepare for your child’s future but aren’t sure whether they’ll need money, especially college.
  • You want your kid to be able to make their own decisions about how to spend their money in the future.
  • To avoid the difficulty of setting up a formal trust,

When it comes to establishing a UTMA/UGMA, you may not want to:

  • To give yourself or another kid a choice to take over your child’s investing account.
  • Want to ensure that your child’s education is the primary beneficiary of the funds?
  • The tax advantages of a 529 plan are more attractive to me.
  • Your child’s college financial assistance may be affected by the UTMA/UGMA.

What Happens to Your Children’s Bank Accounts and Other Assets If You File Bankruptcy?

What happens if you declare bankruptcy and you have financial accounts, or other assets that are in the names of your children? If your children are not yet age 18 or have not yet reached the age of 18 years old, the majority of banks require that you as the parent or custodian be identified as the account holder as well. This means that the money you’ve set aside for the future of your children is at risk of being taken from the trustee during Bankruptcy? The solution will be “it depends”. In the event that you are the owner of the account, you may be considered to be a half-owner in the property. The main question is do you qualify for personal property exemption of $7,500.00? It is contingent on the total value of your other assets and an in-depth analysis of your complete financial situation must be conducted in Bankruptcy HQ – Connecticut. In the end, it’s going to depend on the kind of bank account the child holds and the reason for which the account was established and a myriad of other factors that can be mitigated.

A UTMA or UGMA is an acronym for what?

There are “irrevocable gifts” in UTMAs/UGMAs and custodial accounts.

Since the account was set up by an adult, it does not legally belong to them but the youngster. Gifts to the kid cannot be taken away since they are seen as contributions and earnings for the child themselves.

You don’t own a child’s UTMA/UGMA when you set it up for them. You can’t use the money for anybody other than the kid, and you can’t transfer the account to yourself or another child.

Traditional savings accounts do not have the potential for growth that a UTMA/UGMA has.

As a Northwestern Mutual financial advisor, Dexter Wyckoff explains, “The concept is that we can put money into the market and it grows, keeps up with inflation, and has exposure to diverse market scenarios,” per Insider.

When your kid reaches the legal age of majority, they will have access to the account. It varies from state to state, but the majority is 18 or 21 in the United States. UTMA/UGMA regulations no longer apply if the version is owned by the kid. Thus, the taxable brokerage account rules apply.

UTMA and UGMA are two terms that describe the same thing.

You’re torn between a UGMA and a UTMA, aren’t you? There are two significant differences between the two accounts: where you may establish an account and whether or not you can donate tangible assets. Both versions are incredibly similar.

UGMAs may be opened in any US state.

UGMAs may be opened in all 50 US states, although UTMAs cannot be opened in Vermont or South Carolina. The only option for residents of any of these states is a UGMA.

A UTMA may include tangible assets.

A UGMA does not allow for as much participation as a UTMA does.

“Wyckoff responded, “You can purchase stocks, buy bonds, have a savings account, and invest in mutual funds… but I could never put property into a UGMA account. A UGMA account would not allow me to place a vehicle into it.”

UTMA accounts may hold tangible assets, such as real estate and automobiles.

Because an irrevocable gift is shielded from Wyckoff’s creditors and other family members, “we do this,” he stated. “While it’s very uncommon for parents to die away before their children have reached the age when they can make their own choices, this isn’t always the case. Transferring real estate into a UTMA may provide parents peace of mind knowing that their children will inherit the property while also shielding them from creditors and making the transfer irreversible.”

If you don’t want to go through the legal process of creating a trust, a UTMA may be a better alternative for you than it would be to do so.

Some families, Wyckoff said, are just not in a position to do so. “A costly and time-consuming legal proceeding may be necessary at times. The IRS has designated us as UTMAs, which is a status that is unique to us. You just allocate the asset to the UTMA after opening it. Simple.”

What can you do with UTMA/UGMA funds?

As with a state-sponsored 529 savings plan, you may utilize a UTMA/UGMA as a college savings plan. UTMAs/UGMAs, on the other hand, provide far more spending freedom than 529 plans. Funds for birthday parties, music lessons, and summer camps are all acceptable uses of the scholarship money; they are not required to be used toward a child’s education.

As an irrevocable gift, “the IRS would only want to establish that it was for the kid’s benefit,” Wyckoff said.

This is an excellent option if you don’t know how much money your kid will need for college. There is no guarantee that your kid will attend college or that they will be awarded a full scholarship. In this manner, your child will be able to profit from the account even if they choose a different course in life.

As soon as the account is passed to the kid at the age of majority, all UTMA/UGMA regulations concerning spending money are rendered meaningless.

According to Wyckoff, a taxable brokerage account is all it is now, and the money in there may be used for any purpose a client desires. “The limits apply while the minor’s assets are under the authority of his or her mother or father.”

How are UTMA/UGMAs taxed?

The “kiddie tax” applies to UTMAs and UGMAs.

Taxes on the child’s trust and estate are due if the unearned income, such as interest or dividends, is less than $2,200 in a year, even though this is usually a low or zero amount for most individuals.

According to the tax rates for estates and trusts for the parent, if the child’s unearned income surpasses $2,200, you may have to pay taxes on the unearned income.

Including your kid’s sole unearned income in your yearly tax return rather than filing a separate return for the youngster is an option if it totals less than $11,000 in the year.

Many individuals find taxes confusing. Thus Wyckoff advised consumers to consult with a financial advisor and tax expert before creating an account.

How does a UTMA/UGMA influence college financial aid?

To get financial help for your child’s college education, you may need to complete the FAFSA.

A parent’s assets and a child’s assets are included in the FAFSA. When filling out the FAFSA, parents are expected to contribute up to 20 percent of their child’s net worth toward college costs, with a cap of only 5.64 percent. For example, if just the parents’ assets are retained and declared, the kid may get less financial help from a UTMA/UGMA.

To list the asset as a parental asset, you have the option to convert UGMA/UGMAs and 529 plans. Although there are both advantages and disadvantages to converting, most people choose to consult a financial advisor before making this decision.