How UTMA/UGMA Custodial Accounts Impact Student Financial Aid Eligibility

Posted by Aimee O'Grady, Child Savings Specialist on Feb 16, 2016


Parents should understand how UTMA and UGMA accounts could impact FAFSA eligibility for their children before they commit to a custodial account.

Key Takeaways

  • All assets belonging to a minor impact financial aid
  • Both minor and parental assets are recorded on the Free Application for Federal Student Aid
  • Assets belonging to a minor are weighed differently than assets belonging to parents

Convenience Can Cost You

UGMA and UTMA accounts are established by parents and guardians while their children are still young. These accounts are quick and easy to set up and serve as a depository for monetary gifts received over the minor’s lifetime.  They can also serve as college savings plans, since while students advance through school their savings accounts grow. During the child’s senior year of college, as students begin the financial aid process to help alleviate some of the financial burden of college tuition, they are surprised to see the role UGMA and UTMA accounts play and the impact that custodial accounts have on financial aid eligibility.

Impact on Financial Aid

FAFSA applications can be started on January of every year, where parents, college students, and students in their final year of high school can complete the Free Application for Federal Student Aid (FAFSA) until a specified date.  All assets, large and small, can potentially impact financial aid eligibility. Every asset belonging to the child (and the parents for that matter) diminishes the eligibility amount for grants and some scholarships.

Since assets in custodial accounts, such as UGMAs and UTMAs, belong to the minor, they are counted among the minor’s assets. The federal government treats assets belonging to a minor differently than those belonging to an adult. In 2016, the current financial aid formula requires that the minor contribute 20% of their assets to college costs annually prior to becoming eligible for financial aid; whereas parents must only contribute 5.6% of their assets. What this means is that UTMAs and UGMAs can hurt the minor's eligibility more than parent accounts.

Poor planning and the use of an inadequate savings account can cost thousands in lost grants, loans and other financial aid opportunities.  With the increased scrutiny financial aid officers employ since the federal takeover of the US student loan program, smart planning is imperative.  Luckily, other options such as specially formed irrevocable trusts help students and parents preserve positive treatment during the financial aid consideration process.

Learn more about navigating through the financial aid process and how we can help.

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Tags: Financial Aid, UGMA, UTMA

7 Hidden Setbacks to UTMA and UGMA Custodial Accounts

Posted by Ned Armand, President of Eastern Point Trust Company on Feb 10, 2016


UTMA and UGMA accounts may look good on the outside, but parents should be aware of the many hidden disadvantages to these custodial accounts.

Key Takeaways

  • Custodial accounts have a number of limitations that could prevent your money from being used how you want                             
  • UTMA and UGMA custodial accounts can negatively impact a minor’s eligibility to financial aid
  • It is possible to roll UTMA and UGMA accounts into a Kiss Trust for minors


Explaining Custodial Accounts

UTMA and UGMA accounts are a popular option for investors to easily transfer large sums of money, real estate, or other inheritance to a minor without the need or expense of an attorney. While the accounts have some advantages, primarily their simplicity to establish, there are also a number of disadvantages that every investor (parent and guardian) should be aware of.


Disadvantages of UTMA and UGMA Accounts

While these accounts may have their advantages, here are the inconvenient disadvantages that could cost your child thousands in student loan debt:

  • By definition, these irrevocable trusts cannot be taken back by the Giftor. Once the assets are transferred to the minor, they belong to the minor. It is important for investors not to transfer funds that they may need to recover.
  • Regardless of the maturity level of the UGMA UTMA beneficiary, at age 18-21, depending on your state, the assets must transfer to the young adult at their request.
  • Assets in UTMA and UGMA accounts impact financial aid because the assets owned by the child are weighted more heavily than parental assets (according to Forbes, custodial accounts only make sense if you are certain your child will not need financial aid).
  • Money in a custodial account cannot be transferred to another child. The assets belong to one child only. This may impact families who are unable to give as much money to subsequent children as they were to for the first one.
  • Custodians have no control over how the funds are used, meaning that the child may use these assets for anything, even if the intent was to save for their education.
  • If the Giftor serves as the custodian and dies before the account matures, the assets in the account may be included among the custodian’s assets for estate tax purposes.
  • If the child dies prior to receiving the assets in the account, the accounts are dealt with according to the laws of the state, which may not be in your favor.
Know the Real Costs

Before opening a savings account for a minor, it is important to review disadvantages, as well as the advantages and consider alternatives. Even the best intentions can come back to haunt parents who establish UTMA or UGMA accounts who are poorly informed. Many financial institutions open these accounts without advising the custodian of their drawbacks and limitations. If parents have UTMA / UGMA accounts already established, some financial institutions offer opportunities to roll custodial accounts into alternatives such as an custom irrevocable trust.


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Tags: Student Financial Aid, Financial Aid, UGMA, UTMA

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