Home | Planning and Education| Saving for College| UGMA/UTMA Custodial Accounts

The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) permit annual account contributions of up to $12,000 per beneficiary without taxation under gift tax laws (higher limits apply to married couples contributing jointly). Essentially, you become the custodian of the account to which you are contributing, and the beneficiary is the recipient of account assets.

Eligibility
You can give or transfer assets (often including real estate, art objects, precious metals, etc.) to a minor without the complications of setting up a trust.

Control
The beneficiary may use account proceeds for any purpose and gains complete control of account asset when he or she reaches the age of majority (state-of-residence-determined). Because of this feature, if you absolutely intend account assets to be used for education expenses, an UGMA/UTMA may not be an appropriate investment vehicle.

The account custodian manages the account until the child reaches the age of majority but may not make beneficiary changes.

Taxation

• A child under age 18 is taxed each year on unearned income as follows*:
• First $850, tax free
• Between $850 and $1,700, taxed at the child's rate.
• A child's unearned income over $1,700 is taxed at his or her parents' rate. 
• All earnings for children aged 18 and older are taxed at the child's rate.
• The money you contribute to the account is not pre-tax, but it is not subject to gift taxes.
• Distributions from UGMA/UTMA are reportable on the child's tax return.

* Starting in 2008, these rules also apply to children who either (i) have not attained age 19 by the close of the taxable year or (ii) are full-time students under age 24 whose earned income does not exceed one-half of their support.

Cautions

• Assets in an UGMA/UTMA can negatively affect financial aid eligibility. Financial aid formulas often require that the student contribute a higher percentage of his or her savings than the parent is required to contribute. (Thirty percent or more of student savings may be required vs. 6% of parent savings.)
• Think carefully about moving money from an UGMA or UTMA to a 529 plan:
• Assets in these accounts are the property of the child for whom the account was established. Even if UGMA/UTMA assets are sold and the proceeds moved into a 529, the 529 account remains the property of the child.
• If you sell account holdings in order to move them to a 529, the child for whom the account was established owes taxes. If the child is very young, leaving plenty of time for further asset growth, the tradeoff may make selling a sensible move. But if the child is nearing college, the potential tax-free gains in a 529 account may not be adequate to make the move a smart one.

If you'd like more information about setting up an UGMA/UTMA custodial account with Calvert, talk with your financial advisor.