10/21/2022
The universe of banking instruments is quite broad, so the topic of personal finance can be overwhelming at times. To make things easier for you, we've saved you the trouble of interpretation and research for many relevant products.
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This time we will look at UGMA/UTMA custody accounts, whose particular usefulness we will explain to you better below.
What are UGMA/UTMA custodial accounts?
UGMA (Uniform Gift to Minors) and UTMA (Uniform Transfer to Minors) custodial accounts are savings instruments that you contract with mutual fund companies, financial institutions or brokerage firms.
They are called this way because they are controlled by an adult on behalf of a minor. This condition may vary according to state regulations, which place it at 18 or 21 years of age.
This happens because in most states of the American union, young people are not allowed to own bonds, stocks, mutual funds, pensions or mutual funds. In addition, parents are not allowed to transfer assets to their children. For this reason, there are these accounts, which function as a trust.
The most popular are:
- UGMA. An instrument that stands for Uniform Gift to Minors. It is a way to facilitate the possession of securities. The advantage is that the minor does not need to use an attorney to process the petition for his or her case. Instead, state law determines the terms of this type of trust.
- UTMA. This account stands for the Uniform Transfer to Minors Act. It has the same qualities as the previous one, except that it allows young people to own other types of property, such as real estate, patents, royalties, art, among others. For this option the age of transfer can be up to 25 years old.
Process to sign up for a UGMA/UTMA account
The way to get an custodial account is not complicated. The donor or adult in charge must provide the trustee's name and social security number.
Once this is done, the money or assets become the property of the minor irrevocably, but their disposition is in the hands of the adult until the trustee reaches the age of majority.
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This process is carried out in the institutions we have mentioned. As for limits on contributions to beneficiaries, there are none.
As they do not constitute financial aid, but rather the instruments are taken as equity, the federal government expects that at least 20% of the money will be used for the minor's education.
How does this account work?
Once the escrow account is opened, it is used in the same way as any other fund offered by a bank or financial institution. The adult responsible for the payments has the control to invest the money responsibly. Both the custodian and other entities can make contributions as they see fit.
You know that these instruments may have different types of assets in the minor's name. However, the responsible party will most likely not be authorized to invest in high-risk options, such as derivatives, futures, margin trading and other speculative products. Hence, they are often used to pay for tuition and higher education.
In the distribution of capital, the custodian may request a withdrawal as long as it is under the premise of legitimate needs of the minor. Any expenses that are under this figure, such as tuition, can be paid through this trust.
The difference with respect to other college accounts is that the UTMA/UGMA can be used for any need of the adolescent.
When the beneficiary reaches the age of majority under state law, control of the account will be transferred to his or her name. This means that he/she will be able to use the assets without having to ask for authorization.
In the event that the beneficiary dies before reaching the age of 21 or 18, the trust will become part of his or her estate.
UGMA/UTMA Tax Benefits
Any child who is 19 or 24 (full-time student) and is on his or her parents' tax return receives an "unearned income" tax deduction. Therefore, the first $1,050 deposited is tax-free. The next $1,050 will be in the lesser of 10%.
Unearned income in excess of $2,100 will be taxed at the adult rate. The advantage in this situation would be that young people who reach the age of majority where they reside will be able to file for a tax refund.
Therefore, the earnings will be subject to their tax bracket at the time of filing.
Español: Qué son las cuentas de custodia UGMA/UTMA