UGMA and UTMA accounts are two types of custodial accounts that parents or grandparents can open for their children or grandchildren. These accounts allow for asset transfers to children while still retaining control over the account until the child reaches a certain age. However, there are some key differences between UGMA and UTMA accounts that you should be aware of before opening one.
UGMA stands for Uniform Gifts to Minors Act, while UTMA stands for Uniform Transfers to Minors Act. Both acts were created to provide a way for parents to transfer assets to their children without having to set up a trust or go through probate court. However, there are some important distinctions between the two acts.
One of the main differences between UGMA and UTMA accounts is what types of assets can be transferred into them. With UGMA accounts, only certain types of assets can be transferred, such as cash, stocks, bonds, and mutual funds. UTMA accounts allow for a wider range of assets to be transferred, including real estate and other types of property.
Age of Majority
Another difference between UGMA and UTMA accounts is when the child gains control over the account. In Connecticut, it is 21 for both types of accounts. However, in Massachusetts, the age is 18 for UGMA accounts and 21 for UTMA accounts.
In addition to these differences, there are also some other factors that parents should consider when deciding whether to open a UGMA or UTMA account for their child. For example:
- Taxes: Both UGMA and UTMA accounts are subject to taxes on any income earned in the account. The first $1,100 of income is tax-free, and the next $1,100 is taxed at the child’s rate. Any income over $2,200 is taxed at the parent’s rate.
- Control: Both UGMA and UTMA accounts give parents control over how the money in the account is invested and used. However, once the child gains control over the account (at age 18 or 21), they can use the money in any way they see fit – even if it’s not what their parents intended.
- Protection: Both UGMA and UTMA accounts offer some protection against creditors. However, this protection varies depending on state law.
Overall, UGMA and UTMA accounts can be a great way for parents to transfer assets to their children while still retaining some control over how those assets are used.
When you want to set aside money for a child or grandchild that is definitely going to be used to pay for college, most people would say a 529 college savings plan is a better option. If you start this type of account, you would control it. The earnings would not be taxable at all if the distributions are used to pay qualified college expenses. Unqualified distributions are possible, but they are taxable, and there is a 10% penalty imposed.
There is a financial aid benefit as well. The account will typically be a parental asset, and this can potentially reduce student aid by up to 5.64%. A UGMA/UTMA account would be a child asset for student aid eligibility purposes, and this will reduce aid eligibility by 20%.
Attend a Complimentary Seminar!
Since you found your way to our site, you must be looking for information about estate planning and long-term care protection. You are definitely making the right connection, because we have many resources you can access right here on our website free of charge.
This is one way to build on your knowledge, and you can take the next step if you attend one of our seminars. They are held at comfortable locations throughout our service areas, and they cover all of the topics you should understand when you are entering into the estate planning process. You can see the dates obtain more information if you head over to our seminar schedule page.
Need Help Now?
If you have already learned enough to know that you are ready to work with a Glastonbury or Westport, CT estate planning lawyer to put a plan in place, we can help. You can send us a message to request a consultation appointment, and we can be reached by phone at 860-548-1000.