Considerations When Establishing UTMA Accounts
American Century Investments
The Uniform Transfers to Minors Act (UTMA) allows adults to act as custodians
and open accounts for minors. An adult can transfer an account to the child when
the child reaches the age specified by the act, which in many states is 18 or
21. At the point of transfer, the child controls the account.
All states, except South Carolina and Vermont, have adopted the UTMA. Those two
states use the Uniform Gifts to Minors Act (UGMA). UGMA and UTMA provisions are
similar.
There can be only one custodian and one minor per account. The account is
established using the minor's Social Security number. Consider the following
when opening an account.
Reduced Tax Liability
The tax liability on assets invested in a minor's name may be less than if they
were invested in an adult's name because of the usual differences in tax
brackets.
Under current tax laws, a child under age 18 is taxed each year on their
unearned income as follows:
- First $850, tax free
- Next $850, taxed at the child’s rate (10%)
- More than $1,700, taxed at the parents’ income tax rate
Comparisons of taxes due on $1,700 of unearned ordinary income (interest,
dividends and short-term capital gains) at different tax rates for 2006:
| Child* |
Adult |
Adult |
Adult |
Adult |
 |
| 10% |
25% |
28% |
33% |
35% |
| $85 |
$425 |
$476 |
$561 |
$595 |
|
*Assumes child had no other income from employment and is claimed as a
dependent by a parent or other adult.
Your Child Controls the Account as an Adult
You may have established a UTMA account to pay for your daughter's college
education. But she has the legal right to use the assets as she pleases when she
reaches the age specified by the UTMA. She might decide to use the money to buy
a car, go on a vacation or donate to her favorite charity. Before opening an
account, you may want to consider whether this change of control meets your
goals for the investment.
The Financial Aid Dilemma
Many colleges determine a family's need before granting financial aid. Need
is based on a standard federal formula. The formula typically requires 35% of
the student's assets to be considered when calculating how much to set aside for
educational costs, compared with 5.65% of the parents' assets.
For example, if $50,000 in assets are held in UTMA account, the college would
expect 35%, or $17,500 to be earmarked for school before determining financial
aid eligibility. On the other hand, if $50,000 in assets are held in the
parents? names, the college would expect only 5.65%, or $2,825 to be earmarked.
You may want to consider whether the pursuit of current tax savings outweighs
the possibility of losing future financial aid and control of how the investment
may be spent.
Talk to your financial advisor for further information on the benefits and
considerations of UTMA accounts.
This information is for educational purposes only and
is not intended as investment or tax advice.
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