What is an UTMA account - Pros and Cons - YouTube

Hi, this is Anne with Finance on the Offense, and today I'm going to go over what an UTMA

account is...and I'm just a random person on the internet, so everything in this video

is just for entertainment purposes only.

All right, let's get started.

Long story short, an UTMA account is a way for someone, usually a parent, to give a gift

to their kids.

And this gift can be money, it can be real estate, stocks and bonds, or even like fine

art.

And it's tax free up to a certain point.

UTMA stands for Uniform Transfer to Minors Act, and this is something that got passed

in 1986.

This type of account allows whoever gave the gift, or an appointed custodian, the ability

to manage the account until the minor is of age.

It also lets the minor avoid tax consequences on the money until they're that age, which

is usually 18 or 21, but it depends on the state.

So if you're setting up this type of account for your kid, just make sure you know what

age they're going to get the money.

Now there are several pros and cons to an UTMA account.

Pros: one main advantage of this type of account is that the money contributed to it is exempted

from paying a gift tax, and that's up to $50,000 per year.

Another huge advantage of this account is the way the money can be spent before or after

the minor receives it.

Now the money spent has to be used for the beneficiary of the minor.

So this can actually be a really good way to teach your kids about money.

You could tell them something like, 'Hey, for every dollar you save this summer, I will

match that' and then use the money from the UTMA to match it.

After they're of age, they get the money that's left over in the account to spend on whatever

they want.

It doesn't necessarily have to be college expenses or something like that - it can be

anything.

It's really easy to set up an account, and you can do it with no or very low fees, and

then make very fee-friendly investments inside the account, like just buying low-fee index

funds with the money.

Cons: because assets held in an admin account are owned by the minor, this might have a

negative impact when the minor applies for financial aid, or educational scholarships

based on need.

An UTMA doesn't really have great tax advantages like a 529 College Plan does, but it does

have some.

These aren't retirement accounts, so you would need to pay capital gains on their returns.

So if there are dividends or interest, you need to pay taxes on that.

But the first $1,050 in investment returns is tax free, and the next $1,050 is taxed

at 10%.

The returns after that are then taxed at the parents' rate, which is almost always higher

than the child's.

As I said before, if your kid is applying for college financial aid, the UTMA counts

as their asset.

The FAFSA calculates that 20% of a child's assets are available to fund college, but

only around 5% of a parent's assets are.

So this can work against the child since the UTMA is seen as their asset.

After a certain age, usually 18, 21 or 25, depending on the state, the money becomes

the child's, and they can spend it on whatever they want.

It doesn't have to be specific things like college.

So basically, you'll have to hope that your child will spend the money responsibly at

that point.

If you want to set up an UTMA, all you really need to do is go to a bank, open a custodial

UTMA account, transfer funds to it, and then name a custodian.

This can be you or another family member.

And then you're pretty much done.

So it's really easy to do an account like this.

All right, I hope this video has helped you make a decision about the UTMA account.

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All right, I'll see you in the next video.

Thank you!!!