How to Transfer a UTMA Account to a Child

A UTMA account for a child can be a tax-advantaged way to transfer family heirlooms or valuable assets like investment accounts, real estate, fine art, gems, jewelry, or cash. Unlike other types of accounts like a living trust or a 529 plan, assets in a UTMA account belong to the minor from the moment of transfer. 

In many cases, UTMAs are a smart strategy to start saving for your child now. Is it right for you? Read on to find the UTMA rules and steps for transferring to a UTMA. 

What is a UTMA account? 

A UTMA account refers to a savings account established under the rules of the Uniform Transfers to Minors Act (UTMA). They are custodial savings accounts for minors. 

The account is set up by an adult on behalf of a minor and managed by the adult or designated custodian until the child reaches the age of majority, which is usually between 18 and 21. It can be as old as 25, depending on where you live. 

UTMA accounts are similar to UGMA accounts, which are created under the Uniform Gifts to Minors Act, but UTMA accounts allow a broader range of assets, including real estate, securities, bank deposits, and insurance policies. Can you convert a UTMA to an individual account? Not until the child reaches the age of majority. 

How does a UTMA work? 

UTMA is a law that defines the proper transfer of assets from an adult to a minor. The UTMA rules define a tax-advantaged way to give assets to minors without requiring a trust. A UTMA account is a custodial account. 

When you set up a UTMA account, you can either act as the custodian or appoint another custodian for the account until the child reaches the age of majority. The assets in the UTMA account then belong to the minor, even though they cannot access the assets until the age of majority. 

Once the minor reaches the age of majority, they have the option to convert a UTMA to an individual account. In the meantime, the custodian is responsible for investing or managing the assets on the minor’s behalf. 

Keep in mind that there are some less-than-obvious disadvantages to a UTMA related to the relatively young age that the minor gets access to the funds. For example, in Massachusetts, the age of majority for a UTMA is 21. At the age of 14, the minor may petition the courts for access to some of the funds. 

Suppose there is $100,000 in the UTMA, and your child, grandchild, niece, or nephew. There is nothing you can do to stop them from gaining access to those funds. And your child may be at an age when they are not making the best financial choices for themselves. While you may have envisioned the UTMA as the downpayment to their first home or the seed to their retirement fund, they could burn through those funds before their 22nd birthday. 

What can UTMA funds be used for?

The funds in the UTMA account are a gift to the minor, so they can be used for any expenses related to the minor, including education, sports, or living expenses. In this way, a UTMA functions like a 529 plan intended for educational purposes. 

Unlike a 529 plan, the funds in a UTMA account can also be put towards any type of expense, not just educational ones. Also, there are no penalties for withdrawing funds from a UTMA account, as long as the expenses are directly related to the minor. However, you’ll need to keep close records of the expenses from UTMA and document their direct benefit to the child. 

Profits on interest-bearing UTMA accounts are usually reported on the child’s tax return. Even so, some families choose to report the profits on the parents’ tax return at their parental tax rate.

UTMA transfer rules

UTMA transfers enable minors to receive gifts and assets directly in their name instead of through a trust.  This simplifies the transfer process, avoids the costs and complexities associated with setting up a trust, and provides a straightforward way for minors to manage and have control over the assets once they reach the age of majority

Here is what you need to know if you are thinking about setting up a UTMA account. 

UTMA contribution limits 

Currently, any single individual can contribute up to $17,000 per child per UTMA account without paying gift tax. The limit is $30,000 for married couples. Gifts above $17,000 per adult per year will usually require that you fill out a gift tax form and submit it to the IRS, although it is unlikely you would owe tax on that money unless you’ve given more than $12.92 million in your lifetime. 

UTMA withdrawals and tax rules

UTMA accounts have no withdrawal limits. However, the funds belong to the minor from the moment of transfer, so the funds can only be used for the direct benefit of the minor. Can parents take money out of UTMA accounts? Yes, but only for purposes related to the minor. 

UTMA accounts aren’t tax-exempt, so you’ll need to file taxes each year on income on the UTMA. Earnings need to be reported either on the child’s tax return at a lower tax rate or on the parents’ tax return at their rate. Consult your accountant about your situation. 

Types of assets

You can transfer nearly any type of asset to a UTMA account for a child. Assets include real estate, intellectual property, works of art, stocks, bonds, mutual funds, annuities, insurance policies, cash, and other assets. One of the main advantages of a UTMA account is that family heirlooms, property, stocks, fine art, valuable jewelry, and other assets can be easily transferred to a UTMA account.

Closing a UTMA account 

Once the child reaches the age of majority, they can transfer or use the funds and close the UTMA account. However, after setting up the UTMA account, parents don’t have the option of closing a UTMA account. How do you close out a UTMA account? You can’t until the child reaches the age of majority when they can do whatever they want with the funds. 

Irrevocability

Transfers to a UTMA account are irrevocable. From the moment the transfer is finalized, the assets held in a UTMA account belong to the minor whose name is on the account. 

If the parents need to use those funds at any point in the future, they will not be available to them. When the minor reaches the age of majority, they can legally do whatever they want with those funds. 

Financial aid

A UTMA account may affect a minor’s eligibility for need-based college financial aid. While this factor may not be a deciding factor in whether or not you start a UTMA account for your child, it can affect the financial assistance prospects in your child’s future. 

Steps for transferring UTMA to a child

Transferring a UTMA account to a child is simple. You can do so with most financial or investment institutions. You can also consult a tax or business lawyer to help you set up the legal structure, although most financial institutions can do this for you. 

Step 1: Set up a brokerage account

If you plan to invest cash or securities into a UTMA account for your child, start by opening a UTMA account at your bank or a local investment firm. The custodial UTMA account will be in your child’s name and governed by the rules of UTMA with you, or the adult you appoint, named as custodian. You can also set up a brokerage account via mobile apps like Acorns Early or UNest. 

Step 2: Add assets

Once the UTMA account is set up, you can choose to add assets daily, weekly, monthly, or annually or less often. You could add precious jewelry, art, property, bonds, stocks, investment accounts, cash, or other assets. 

Step 3: Use the funds

The funds stay in the account until the child reaches the age of majority unless you choose to withdraw the funds on behalf of your child or to support the child’s financial needs. The funds can be put towards nearly everything, including education, sports, and living expenses. If you have significant education or sports expenses for your child, for example, you could use the UTMA funds for that. 

You can also choose to save the UTMA funds for future life events, like a first car, first apartment, or wedding. Once they get access to the funds, the child may also choose to convert the UTMA to an individual account.

UTMA Account Pros and Cons

UTMA accounts can be a tax-advantaged way to transfer all types of assets to your child. How to transfer a UTMA account to your child is simple. They allow you to give any asset to the child. It’s also a way to save funds for education and sports expenses before your child goes to college. 

However, it also means they will have full access to the funds at the state-specified age of majority and may petition to gain access to some funds at an even younger age. Once they gain access to the funds, you have no control over how they use the funds. 

Other structures, including a trust, or a 529 may be better depending on your goals. Deciding on the intentions for the gift to the child can help weigh the pros and cons of each account. Speak with your financial advisor or tax lawyer to determine whether a UTMA account’s advantages outweigh the disadvantages in your case. 

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