We are all concerned with what is best for the children in our life. We all worry whether it’s about our grandchildren, nieces and nephews, relatives, neighbors, acquaintances, or even our own children. Nobody wants their children to encounter financial difficulties in the future.
In that regard, custodial accounts provide an excellent investment opportunity for parents to gradually accumulate money for a kid over time. However, there are two sorts of custodial accounts, and each has its own set of requirements. UTMA accounts (called after the Uniform Transfers to Minors Act) and UGMA (after the Uniform Gift to Minors Act) accounts are the two forms of custodial accounts.
In this article, we’ll cover all you need to know about setting up a UTMA account for your close ones, including popular uses, who pays taxes on a UTMA account, and what happens to the UTMA account when the child turns 21.
What Can You Do With A UTMA Account?
One of the two basic forms of custodial accounts is the UTMA account. A custodial account is a tax-advantaged investment structure that allows adults to save money or other assets for youngsters. The adult who establishes the custodial account is accountable for overseeing the funds, holdings, or assets as the custodian. However, everything in the fund is legally the property of the beneficiary minor.
When a minor beneficiary of a UTMA custodial account reaches a certain age of maturity, the custodianship ends and the minor beneficiary gains legal control over everything in the account. It is crucial to remember that the age of the majority varies somewhat in each state. In most circumstances, the age is either 18 or 21. However, a UTMA takes longer to grow in other states. Similarly, an adult can choose to keep custody of the assets until the recipient reaches the age of 25, depending on the state where the account is located.
A UTMA custodial account can be used to house a variety of asset classifications, including:
- Stock options
- Shares of mutual funds
- Deeds of real estate
- Intellectual property rights
- Precious metals and fine art
- Family limited partnership shares
Who Is Responsible For Paying Taxes On A UTMA Account
Because the assets in custody accounts are the legal property of child beneficiaries, the IRS taxes earnings earned by a UTMA at the kid’s tax rate, but only up to a certain threshold.
When the child beneficiary reaches adulthood in your state, they will be eligible to file their tax return. This implies that the profits in their custodial fund will be taxed according to their age bracket. When it comes to submitting tax returns, however, there is always an exception to the norm. If you are under the age of 19 or a full-time student under the age of 24, you can continue to file your taxes as part of your parent’s tax return.
Can You Withdraw Money From A UTMA Account?
Money can be withdrawn from a UTMA account. However, there is one important requirement to remember: any withdrawals from a custodial account must be for the beneficiary’s direct benefit. That is, if you are the custodian of a UTMA account and need money to pay for your child’s private school tuition, you can withdraw money from their UTMA.
However, many custodial account providers will not enable you to withdraw funds from the account to cover ordinary child care costs. You won’t be able to withdraw cash from a child’s UTMA to pay for electricity bills or a trip to the grocery shop, for example. Also, remember the golden rule: once the account’s child beneficiary achieves the age of majority, the adult’s custodianship ceases. This implies that the adult who set up the UTMA account will never be able to withdraw money from it again, even on behalf of the kid, because everything in the account would be passed on to the beneficiary.
How Does A UTMA Change When A Child Turns 21?
Everything in a custodial account passes to the child beneficiary when they reach the state’s legal majority age. The age of majority for a UTMA varies per state. Most states use a 21-year-old as the age of majority, which implies that when a kid becomes 21, they lose custody of assets. In some states, however, the majority age is either 18 or 25. The custodian may also pick from a range of ages on occasion. In Virginia, for example, the UTMA custodian can select whether the beneficiary receives ownership of the account assets at the ages of 18, 21, or 25.
Custodial accounts are an excellent investment option for people looking to gradually develop money for a kid over time. However, there are two basic types of custodial accounts, each with its own set of advantages and disadvantages.