UTMA: The Smartest Way to Transfer Assets to Your Children
The following article is for educational and entertainment purposes only, and should not be read as financial advice. For individual financial advice, please contact a licensed financial professional. Not a paid endorsement.
How To Transfer Wealth To Your Children
As a parent, you likely want to do everything in your power to set your children up for success. One way to do this is by passing on wealth to your children, assuming you have wealth to start with. But, if your children are minors, you may be wondering how to do this in a responsible and legal way. That's where UTMA comes in.
UTMA, or the Uniform Transfer to Minor Act, is a set of laws that allows you to transfer assets to a minor without the need to set up a trust. UTMA accounts are a popular choice for parents who want to give money, investments, or other assets to their children, but may not be ready to fully transfer control to the child because their child is still in the "shithead" phase of life.
Here's what you need to know about UTMA and how it can be used to pass wealth to your children.
What is UTMA?
UTMA is a set of laws that were enacted in the United States to allow for the transfer of assets to a minor without the need to set up a trust. UTMA accounts are set up through a financial institution, such as a bank or brokerage firm, and are managed by a custodian. The custodian is responsible for managing the assets in the account on behalf of the minor until the child reaches the age of majority, at which point the child assumes control of the assets, in a ceremony known as "Holy Shit I'm Worth How Much?" Day.
It's incredibly important to note that UTMA ages of majority vary pretty widely from state to state, so please contact a professional in your state to determine the age of majority.
One of the main benefits of UTMA is that it allows you to transfer a wide range of assets to your child, including cash, stocks, real estate, and more. This flexibility can make it a good choice for parents who want to pass on a diverse portfolio of assets to their children.
How To Set Up A UTMA
Setting up a UTMA account is relatively straightforward. First, you'll need to choose a custodian for the account. This can be anyone over the age of 18 who is responsible and trustworthy, such as a parent, grandparent, or other relative. It could even be you if you stopped drinking so much.
Next, you'll need to choose the assets that you want to transfer to the UTMA account. These can be assets that you already own, or you can purchase new assets specifically for the UTMA account. These assets can include stocks, bonds, cash, and even some real estate assets (though please check with a certified professional before you start the transfer).
Related: Investing in Stocks? Start Here.
Once you've selected the assets, you'll need to transfer them to the UTMA account. This is typically done through a gift tax return, which will need to be filed with the IRS.
It's important to note that there are limits on the amount of assets that you can transfer to an UTMA account. Currently, the annual gift tax exclusion is $17,000 per person, per year in 2023. This means that you can transfer up to $17,000 per person per year to an UTMA account without incurring any gift tax ($34,000 for married couples). If you want to transfer more than this amount, you'll need to pay gift tax on the excess.
Advantages of UTMA
There are several advantages to using a UTMA account to pass wealth to your children:
Flexibility: UTMA accounts allow you to transfer a wide range of assets to your child, including cash, stocks, real estate, and more. This flexibility can make it a good choice for parents who want to pass on a diverse portfolio of assets to their children.
Control: As the custodian of the UTMA account, you have control over how the assets are managed and invested until the child reaches the age of majority. This can give you peace of mind knowing that the assets are being managed responsibly.
Tax benefits: UTMA accounts are generally taxed at the child's lower tax rate, which can result in significant tax savings.
Disadvantages of UTMA Transfers
While a UTMA account can be a useful tool for passing wealth to your children, there are also some potential disadvantages to consider:
Age of majority: The age of majority, at which the child assumes control of the UTMA account, varies by state. In some states, it's as young as 18, while in others it's 21, and some even make your child wait until they're 25. This means that you may not have as much control over the assets as you would with a trust, which can have a longer term.
Lack of control after age of majority: Once the child reaches the age of majority, they have complete control over the assets in the UTMA account. This can be a concern if you failed as a parent and the child is not financially responsible, or if you have specific plans for the assets, such as using them to pay for education or other expenses.
Gift tax: As mentioned earlier, there are limits on the amount of assets that you can transfer to an UTMA account each year without incurring gift tax. If you exceed these limits, you'll need to pay gift tax on the excess.
Alternatives to UTMA
If a UTMA account isn't the right choice for you, there are other options for passing wealth to your children. Here are a few alternatives to consider:
Trust: A trust is a legal entity that allows you to specify how assets should be managed and distributed. Trusts can offer more control and flexibility than UTMA, but they can also be more complex and costly to set up and maintain.
529 plan: If you're planning on stashing some cash to save for college, this is the way to do it. A 529 plan is a tax-advantaged savings plan that can be used to save for a child's education. Contributions to a 529 plan are not subject to gift tax, and the earnings grow tax-free as long as they are used for qualified education expenses.
Custodial account: A custodial account is similar to an UTMA account, but it's set up under the Uniform Gifts to Minors Act (UGMA) rather than UTMA. Like UTMA, UGMA allows for the transfer of assets to a minor without the need to set up a trust. However, UGMA accounts are generally more limited in the types of assets that can be held and may not offer the same tax benefits as UTMA.
In conclusion, a UTMA account can be a useful tool for passing wealth to your children. It offers flexibility, control, and potential tax benefits, but it's important to consider the potential drawbacks as well. If you're considering using UTMA to pass wealth to your children, it's a good idea to consult with a financial advisor or attorney to determine if it's the right choice for your situation.