The main difference between the UTMA and UGMA account is what type of assets they can hold. Assets within an UGMA account are limited to stock, bonds, mutual funds, bank deposits, and other securities and insurance policies. Assets within an UTMA account allow almost any kind of asset, including real estate to be given to the minor.

A withdrawal can be initiated by the custodian for the benefit of the child as long as the expenses are for legitimate needs. Any expense that is for the benefit of the child, such as pre-college educational expenses, may be paid from the custodial account, at the custodian’s discretion. Unlike other college savings accounts, however, these expenses are not limited to education and can be used for anything related to the child. Once the beneficiary reaches the maturity age, they can use the money without limitations.

Advantages:

You can contribute as much as you want.
Anyone can open or contribute on behalf of the beneficiary.
There is no penalty if the assets are not used for college, unlike the 529 plan.
These accounts may be less costly and complicated than trusts.

Disadvantages:

Contributions to an UTMA or UGMA are irrevocable transfers.
These accounts are considered an asset of the child and are counted against financial aid.
Once the beneficiary has control of the assets, they can use it as they please and may not necessarily use the assets for the reasons you intended.

Tax consequences:

Contributions are not tax deductible.
Earnings are subject to federal income or capital gains tax.
It is beneficial to be aware of how gifts affect your annual gift tax and lifetime estate tax exclusions

Points to consider:

UTMA accounts allow more time for control by the custodian of the assets then UGMA accounts and accept more types of investments.
Any unused money must be distributed by the time the child reaches the age of maturity, or the maximum age allowed for the custodial accounts in their state.
You are able to transfer an UGMA or UTMA to a 529 plan, but there are conditions and you are not able to change the beneficiary.

Deciding if it is right for you:

If you choose to gift securities or real estate, then UGMA and UTMA accounts can provide a simple option for your gift. If you would like to give cash, it may be a better option and a way to lower the risk of a beneficiary spending the money irresponsibly, to make contributions to a 529 plan in the child’s name. The money in the 529 plan can be invested in mutual funds, stocks and bonds, or a managed fund specific to the child’s age. The investment income within a 529 plan is not taxed, and some states offer tax deductions for your contributions. Also, the 529 plan allows you to transfer unused assets to another beneficiary.

Opening a custodial account can be a great way to gift assets to your children and help them become financially independent. However, there are many considerations to think about and consequences to weigh. It is always good practice to research your options and seek professional financial council to help you make the best decisions to reach your financial goals.

Carol Chaudet

(Updated 1/5/2018)