Custodial Savings Accounts for College
What are they?
Custodial accounts, which include the UGMA and the UTMA, are the most popular forms of savings programs for minors. To make a long story short, most states do not allow minors to contact. That means that minors can't buy or own any kind of stocks, bonds, annuities, mutual funds or life insurance policies. If parents or guardians hold assets that they want to turn over to minor children, they cannot. What they must first do, until the child is a legal age to take over the assets, is set up a trust fund.
UGMA Trust
This is the most common type of trust fund for a minor. The Uniform Gift to Minors Act (UGMA) established an easy method for a minor to own assets or securities. The UGMA does not require the help of a lawyer to get the trust papers or the court appearance of an account trustee.
UTMA Trust
Similar to a UGMA, the UTMA is also a common trust fund for minors. The Uniform Transfer to Minors Act (UTMA) allows for the transfer of assets to minors, but it also allows for the transfer of not just stocks, mutual funds, bonds, annuities and life insurance policies, but also property (like fine art, real estate royalties and patents) and it can be transferred to the minor through an inheritance. Of the two, the UTMA trust is a little more flexible than the UGMA trust.
How They Work
First of all, the donor of the trust will need to appoint a trustee (custodian). They will then have to provide the social security number and name of the minor. The donor will place the assets into a trust; they cannot be revoked once that is done.
The assets, whether money, stocks and bonds, art or property will then belong to the minor. However, the minor cannot retain control of the trust until he or she is the age of "trust termination" (usually between 18-21, but varies from state to state). This will also be reliant to they type of trust established, whether it is a UGMA or a UTMA.
Although the trust "belongs" to the minor, the custodian (or trustee) will retain control over the trust. That means the custodian will have to properly manage the trust until the minor reaches the age of trust termination.
Taxing of a UGMA or UTMA
Any income obtained from the trust (stocks, bonds, annuities, etc.) will have to be reported on the minor's tax return. It will be taxed at a child's rate. The parent of the minor will be responsible for making sure the proper filing of the return takes place. The minor will need to sign his or her own tax returns starting at the age of 14.
What Can UGMA/UTMA Fund be Used for?
The custodian can use the funds from the account as he/she sees fit...provided it is for the benefit of the minor. It can be used for anything not considered a "parental obligation"; which includes food, clothing , medical care and shelter. Once the donor opens the account, the "gifts" cannot be transferred back.
More Information:
To learn more about the benefits of a UGMA or a UTMA trust, a great resource is theeducationplan.com. You can also learn more at finaid.org.
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