The Uniform Transfers to Minors Act (UTMA) and The Uniform Gifts to Minors Act (UGMA) offers adults, typically parents, an opportunity to transfer assets to minors, similar to a trust, but without the expense of establishing one. The assets are held in a custodian's name until the child reaches maturity. The UGMA and UTMA accounts are usually used to pay for college, but minors can use the funds to pay for such things as summer camps, books, computer/electronic hardware and cost of living expenses. The main difference between an UTMA and UGMA account is the kind of assets they hold. Allowable assets found in an UGMA account include bank deposits, stocks, bonds, mutual funds, and other securities and insurance policies. Assets within a UTMA typically include patents, royalties, real estate, and fine art. There are a couple of matters one should consider prior to setting up and funding an UGMA or UTMA account.
- Both UTMA and UGMA accounts rely on a custodian to manage the assets in the account on behalf of a minor beneficiary.
- All gifts made to an UTMA or UGMA account cannot be revoked. Unlike a trust, assets in these accounts are considered “completed gifts” and cannot be changed.
- When the beneficiary comes of age, the UTMA and UGMA accounts are completely under his or her control.
- Net unearned income from an UTMA or UGMA account is a key element in determining the kiddie tax. However, this tax is complicated. While the 2018 Tax Cuts and Job Act has lessened some of the past complexities, there are some new elements that make the computations increasingly difficult to determine. Before setting up one of these types of investment vehicles, It is wise to consult an accountant to assess the tax advantages.
- Financial aid is typically reduced by 20-25% of the UGMA or UTMA balance. Other college savings plans often have a smaller effect on financial aid. A 529 account, for example, has an average 5% effect on financial aid.
- Do consider establishing a Power of Attorney (POA) for your child.
- Do look for a 529 fund with low expenses and consistent growth in performance.
- Do draft a Healthcare Proxy.
- Do explain to children that once they become an adult, you are restricted from obtaining their health information unless they prepare a written consent.
- Do inform your child about his/her healthcare coverage, particularly if you have an HMO plan.
- Call your homeowner’s agent if you need additional insurance on your child's electronic equipment at college.
- Call your auto insurance company to notify them of a vehicle location change if your child takes a car to college.
- Ask your insurance agent whether anything needs to be updated on your umbrella policy.
- Don’t overlook the possibility of asking grandparents to contribute to their grandchild’s college fund.
- Don’t think college is automatically paid for if your child joins an ROTC Program.
- Don’t forget anyone can contribute to your child’s 529 plan.
- Don’t forget saving sooner is better than later. Compound interest needs time to work.
Comprehensive Financial Help – Advice and Implementation
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Kim & Jay’s Achievement
Kim and Jay started their family when they were in their 30s. With a modest income, they were concerned they would not be able to afford the high cost of college for their daughter Ashley. They came to us for financial advice. We first put them on a budget. Then we explained how similar families successfully afforded college tuition for their children using college investment plans such as the 529 plan. Kim and Jay left the appointment rolling up their sleeves and ready to get to work.
Within a few weeks, Kim called us with terrific news. She explained that she and Jay talked to his parents about 529 plans. The parents decided to gift them $20,000 to start a college savings fund for Ashley. The $20K initial investment, coupled with $100 monthly contributions, grew their college fund to $110K in 15 years and saved the couple over $37,500 in taxes.
Today, Ashley attends a state university. She was awarded a merit scholarship and took out a small loan. The rest of her education is funded by the 529 plan. Ashley is studying to be an architect; Kim and Jay are proud parents.
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