The Uniform Transfers to Minors Act or (UTMA) extends the Uniform Gifts to Minors Act (UGMA) to include property other than cash, for example real estate, patents, and art. Under regular rules minors aren’t allowed to own certain assets, like real estate for example, since they’re not legally able to enter a contract. Under this act, parents can transfer assets to their children without having to go to court or get an estate plan attorney. While UGMAs generally end at age 18, in some states, UTMAs end at age 21.
To enact rights under the UTMA, the parent has to create a custodial account for the minor child who’s supposed to receive the property. The UTMA account can be created at most large financial institutions. The parent doesn’t have to make a full transfer all at one time. The trust can receive transfers even after the creation date. Other people are allowed to transfer assets to the trust. However, if the parent has multiple pieces of property to gift to multiple children, then multiple trust accounts must be set up. There can only be one custodian, one beneficiary and one successor custodian for each account.
Gifts put into the trust are irrevocable meaning the parents can’t take them back or switch them to another beneficiary. After the transfer is made, the minor child is the legal owner and the account custodian, who may be different from the parent, controls use of the asset until the minor child reaches the proper age for that state.
One of the main benefits of a UTMA is that the gift avoids probate when the parent or other donor passes away. Avoiding probate ensures the gift isn’t distributed to someone the parent didn’t intend for it to. That also means the beneficiary can access the gift sooner.
The custodian can make decisions about what to do with the assets in the account as long as they treat the property as if it were their own. Law requires the custodian to be “prudent” about decisions made with the account. And transactions must benefit the child, but cannot be used toward any parental obligation. Custodians should keep a track of any transactions that are made with the property just in case they’re ever asked to account for the activity.
Certain types of transactions may be subject to federal and state income tax at the child’s tax rate. Another of the custodian’s fiduciary responsibilities is to make sure any applicable taxes are included on the child’s tax return. Only a certain amount of child’s income is exempt from federal tax. Taxable income doesn’t have to be included on neither the donor’s nor the custodian’s tax return. The custodian should keep a copy of the minor child’s tax return. A tax professional can help you figure out what taxes are owed on the UTMA account.
When the custodial account is created, parents should plan the custodial successor in the event that the custodian (even it it’s a parent) passes way. Only one successor custodian can be named on the account. The minor child may be able to name their preferred successive custodian, depending on state law.
The child takes control of the assets in the trust once they reach the appropriate age in their state. That could be either age 18 or age 21 depending on the state’s law.
The assets in the UTMA account could lower the amount of financial aid the child qualifies for when they’re applying for financial aid. Despite this drawback, some parents prefer the Uniform Transfers to Minors Act options over a 529 college fund because there is no loss if the child decides they don’t want to attend college.