The Uniform Transfer to Minors Act (UTMA) allows gifts of property to minors without the need for a trust. The custodian controls the assets until the child reaches the age of majority, with a fiduciary responsibility to invest appropriately. The IRS regulates taxation of earnings on UTMA assets. UTMA accounts may affect financial aid applications for college.
In the United States, the Uniform Transfer to Minors Act (UTMA) allows gifts of real and personal property to be made to minors and eliminates the need to form a trust. Under UTMA, a donor transfers assets, such as real estate or artwork, to a custodian for the benefit of a minor. UTMA is an extension of the Uniform Gifts to Minors Act (UGMA). The UGMA regulates how gifts of cash, securities, life insurance, and annuities are transferred to minors.
The custodian controls, but does not own, the assets when ownership is transferred using UTMA. Control passes to the minor when the child reaches the age of majority, usually 18 or 21. In some states, the donor may indicate in a will that the transfer should not be made until the minor reaches the age of 25. When the transfer is complete, the UTMA account is closed.
The law allows gift transfers to minors during the donor’s lifetime or upon the donor’s death. When the custodian assumes control of the assets, the custodian has a fiduciary responsibility to invest the assets appropriately and act in the best interests of the child. The guardian decides the frequency and amount of payments to the minor.
The Internal Revenue Service (IRS) regulates how earnings on UTMA assets are taxed. Typically, only a small portion of earnings are taxed, at the child’s tax rate, each year. Any remaining earnings are taxed at the much higher parent or legal guardian tax rate. Part of the custodian’s role is to provide all the information needed to file the child’s annual state and federal tax returns.
The custodian must also keep records of all operations. Since the custodian is essential, many times a successor custodian is appointed for each account. This will help protect the best interests of the child in the event that the original guardian dies or is unable to perform their duties as required.
In general, all gifts are subject to IRS gift tax. Donors can donate up to a certain amount per year without paying this fee. Assets transferred under UTMA without the use of a trust follow this gift tax rule.
Students with UTMA accounts may be at a disadvantage if they require financial aid to pay for tuition. Because the student owns the assets in the account, the value must be included in any financial aid application. This can be a problem, since the account likely has real or personal property that can’t easily be sold to cover college costs.
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