Advantages and Disadvantages of UGMA and UTMA

Advantages of UGMA and UTMA

The primary advantage of the UGMA/UTMA accounts is simplicity. The standardization of the rules, regulations, and guidelines for the transfer made custodial accounts accessible to everyone. Even the low income grand parent that simply wanted to put away $25 per week into a college fund for their grandchildren, a fund the parents could not touch, has access to a legal vehicle without hiring a lawyer. The donor would simply instruct their banker to set up the account, they would name a custodian and successor custodian, an age when the minor could receive funds not already distributed and everything was set. Prior to the UGMA/UTMA accounts, setting up a custodial account like this was something that only those of means could afford.

The secondary advantage to UGMA/UTMA accounts is that the assets that are in the name of the UGMA/UTMA trust are taxed as assets of the minor. This is advantageous because under most circumstances the minor is paying less in taxes than the donor. Therefore it is an advantage for a donor to put the money into a UGMA/UTMA account. For example, say the donor wishes to assist the minor in buying a home one day, if that donor begins saving and investing for the minor in a UGMA/UTMA account the account will grow faster because it will be taxed at a lower rate than if it were held solely by the donor.

A third advantage to a UGMA/UTMA account is that the funds in the account are sheltered from lawsuits and seizures that are made against the custodian or donor. This means that without the UGMA/UTMA designation, if the donor had a savings account that they intended to go to the minor in the future, and they had an asset seizure, the funds would be gone. But if the funds were held in an UGMA/UTMA account, the funds would be sheltered from that seizure.

Disadvantages of UGMA and UTMA

The primary disadvantage of the UGMA/UTMA account is control. There are many reasons why people want to save for the benefit of others. Maybe a donor wishes to save for a minor’s college education, a down payment on a home, or even for a wedding. But with the UGMA/UTMA accounts there is no way to designate the purpose of the money. Therefore if the donor wishes to pay for college, yet the child does not wish to go to college, with the UGMA/UTMA accounts the money will still belong to the minor. The same thing applies if the money is meant for a home, but the minor wishes to go on a vacation with the funds, there is nothing that the donor can do if the child has already reached the age of majority, as specified on the establishment of the UGMA/UTMA account.

This lack of control is also psychological and will decrease the amount of money that the donor may set aside for the child. If a donor knows that they can retrieve some funds in case of an emergency they will more aggressively put money into a custodial account. If they know every time they donate to the account they can never again touch the funds, they will more than likely contribute to the account less frequently. It is a simple matter of human nature, there is a difference between setting aside money that you can take back, and giving it permanently. If you know you can get it back, you will set aside more money, more frequently.

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