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Home » Estate Planning » College Savings Accounts Demystified

College Savings Accounts Demystified

March 31, 2022 by Jeffrey A. Nirenstein, Estate Planning Attorney

UGMA accountIf you want to set aside assets for the college education of your child or grandchild, you have to navigate a maze of numbers and acronyms. It can be quite confusing, but we will demystify the subject in this post.

Uniform Gifts to Minors Act (UGMA) Accounts

The uniform Gifts to Minors Act is a type of custodial account that can be used to contribute money into an account that will benefit a loved one when they reach the age of majority. One of the benefits is the tax advantage.

These accounts are funded with after-tax income, so distributions of the principal are not subject to further taxation. The earnings are taxable, but the first $1050 is tax-free, and the second $1050 is taxed at the child’s rate, which is just 10 percent for ordinary income.

There are limitations with regard to the types of assets that can be held in a UGMA account. The custodian can use assets in the account to purchase securities and insurance policies, and it can hold cash.

Speaking of the custodian, this individual or financial institution would have a fiduciary duty to serve the best interests of the child. If you establish and fund one of these accounts, you could act as the custodian, or you could name a professional fiduciary or someone that you know.

In the state of Connecticut, the age of majority for UGMA account access purposes is 21, but it is just 18 in about half of the states. Once the child reaches the age of 21, assets in the account can be used for any purpose; utilization is not limited to college expenses.

While there are no contribution limits, you have to be aware of the potential impact of the federal gift tax. The first $16,000 that you give to any individual during a calendar year can be transferred free of the gift tax, so you should keep this in mind if you are funding a UGMA account.

Anyone can make a contribution into a UGMA account, so multiple family members and friends could choose to convey resources into an account. The assets in the account are considered to be the property of the child, so they do count if the individual applies for financial aid.

UTMA Accounts

The Uniform Transfers to Minors Act was originally drafted in 1986, and most states have adopted it. All the rules are the same as the UGMA account guidelines with a couple of exceptions.

Investment options are not limited to securities, cash, and insurance policies. Any type of property can be conveyed into a UTMA account.

The other difference is the mandated account termination age. Assets must be withdrawn or transferred from a UGMA account when the beneficiary is 18, and the termination age is 21 for UTMA accounts.

Section 529 Savings Plans

Many would say that the Section 529 savings plans are the best way to set aside money that is definitely going to be used to pay for college expenses. You make after-tax contributions, and there are no further taxes on growth as long as withdrawals are used for qualified education expenses.

When you establish and contribute into one of these accounts, you have a safety valve. If you want to close the account and take back the resources for some reason, you can do so, but penalties and fees would be applicable.

Approved expenditures include tuition, room and board, computers if they are required by the school, and other supplies that are necessary to complete the curriculum.

For financial aid purposes, the assets are considered to be the property of the parent or grandparent that funded the account. As a result, a maximum of 5.64 percent can be counted if the child applies for student aid.

Schedule a Consultation!

We are here to help if you would like to work with a Hartford, CT estate planning lawyer to put a plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 860-548-1000.

 

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Jeffrey A. Nirenstein, Estate Planning Attorney
Jeffrey A. Nirenstein, Estate Planning Attorney
Founding Partner and Vice President at Nirenstein, Horowitz & Associates PC
Jeffrey A. Nirenstein is a founding partner and vice president of the law firm of Nirenstein, Horowitz & Associates, P.C. He received his bachelor of arts degree in government from Clark University and his law degree from New York Law School.

Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.
Jeffrey A. Nirenstein, Estate Planning Attorney
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Filed Under: Estate Planning Tagged With: Section 529 savings plans, UGMA account, UTMA account

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