The Dark Side of UTMA Accounts

/ Planning Within Reach, LLC/

With this next post, I wanted to share an issue I have seen a couple times within the last few months. Parents have called asking how to postpone their child from receiving a UTMA account at age 18. The answer is, you cannot postpone the inevitable. Minor children cannot legally hold mutual funds, stocks, bonds and life insurance policies. If parents want to transfer these to their children, they have the option to set up a UTMA (or UGMA) account for them. The issue is that this money needs to be handed over to the child at the age of majority (age 18 or 21 depending on the state).

This may seem in the distant future when you are holding a newborn in your arms, but the reality is that the age of majority, whether 18 or 21, is still incredibly young. Not surprisingly, there are some young adults that are just not ready or responsible enough to receive a lump sum.

UTMA funds are irrevocable gifts. The article below is a good overall summary of UTMA’s. It mentions that one option is to spend the money for the benefit of the child before the age of majority. You would need to use the money for items other than parental obligations and work with a qualified accountant.

http://www.finaid.org/savings/ugma.phtml

An alternative vehicle for parents looking to gift assets to their children is a 529 account. It is often the one I recommend. While it also has its limitations, when presented with the pros and cons of each, parents often choose the 529.

I recommend meeting with a financial planner to review your specific situation and see which vehicle may be better for you.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.