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