MoneyLife

How To Transfer UTMA Account to Child

By Alison Kimberly
How To Transfer UTMA Account to Child

Setting up a UTMA account for a child has advantages for adults to save funds and reduce taxes, and advantages for a minor to build savings. The process of “how to transfer UTMA account to child” requires only a few steps.

However, a UTMA account can set your child up for financial success. With the flexibility that a UTMA account offers, you can add nearly any type of asset to a UTMA account. If you want to start saving for your child, here is what you need to know! 

What is a UTMA account? 

A UTMA account refers to a savings account established in accordance with the rules of the Uniform Transfers to Minors Act (UTMA). Essentially, 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, though it depends 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. 

How does a UTMA work? 

A UTMA account is a custodial account. 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. 

The adult who sets up the UTMA account 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. 

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. 

However, unlike 529 plans, 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. 

Any profits on the UTMA account 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 of assets directly instead of through a trust. At the same time, there are rules governing these accounts just as there are rules surrounding trusts. 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 $15,000 per child per UTMA account without paying gift tax. The limit is $30,000 for married couples. Gifts above $15,000 per adult per year will usually require that you pay a gift tax via a form from the IRS. That gift will also be counted towards the lifetime gift-tax exclusion limits moving forward. 

UTMA withdrawal limits 

There are no withdrawal limits on a UTMA account. However, the funds belong to the minor from the moment of transfer, and therefore, the funds can only be used for the direct benefit of the minor. So, can parents take money out of UTMA accounts? Yes, but only for purposes related to the minor. 

Types of assets

You can transfer nearly any type of asset to a UTMA account for a child. This includes 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, and other assets can be easily transferred to a UTMA account.

Taxes

A UTMA account is a taxable account, meaning the earnings need to be reported either on the child’s tax return at a lower tax rate or on the parents’ tax return at a higher rate.  

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. 

This means that 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 financial aid. While this may not be a deciding factor in whether or not you start a UTMA account for your child, it is worth noting as it will affect the financial assistance prospects in your child’s future. 

Steps for transferring UTMA to child

If you are ready to set up a UTMA account for your child, 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 will do this for you. 

There is really only one step to setting up a UTMA account, which is to open it. Here are the basic steps for how to transfer UTMA account to a child! 

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 banks or a local investment firm. The custodial UTMA account will be in your child’s 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 through 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. This includes cash transfers as well as all other types of assets. 

Step 3: use the funds

The funds will grow untouched until the child reaches the age of majority, unless you choose to withdraw the funds on behalf of your child or in order to support the child’s financial needs. The funds can be put towards nearly everything, including education, sports, and living expenses. The funds can also be saved for future life events, like their first car or their wedding. 

Future dreams start with early planning

Learning how to transfer UTMA account to child is a financial tool that can help you start planning for your child’s future while your child is still young. If you want to ensure that the funds are there for big life events, like college, a wedding, or a mortgage-related down payment, starting a UTMA account can be a vehicle to secure those dreams. 

In addition to a UTMA account, MoneyLion can help you save more through a RoarMoney account, personal financial tracking, and financial safety net. You can also use a MoneyLion investment account to grow your personal wealth starting with as little as $5! 

These tools will not only help your child in years to come. They will also help to build a financial security net that will make it possible for you to provide for your family and pursue your own dreams without worrying about how you’ll afford them!

Frequently Asked Questions

Can I close a UTMA account?

No, you cannot close a UTMA account like you can for a personal account or living trust. The UTMA account belongs to the minor, making it irrevocable.

What happens to the UTMA account when the minor turns 21?

Depending on state laws and the terms that were established when the UTMA account was set up, the custodian of the UTMA account rescinds control over the account when the minor turns either 18 or 21, though in some cases, the minor won’t gain full control over their account until they turn 25.

Do I have to pay taxes on UTMA accounts?

Since the assets placed in a UTMA account are owned by the child, the earnings are usually taxed at the child’s tax rate. Up to $1,050 in earnings is tax-free, while earnings over $2,100 are taxed at the parents’ tax rate.

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