The Benefits of Opening an UTMA/UGMA for Your Grandchildren
on Aug 29, 2024
Grandparents, are you looking for ways to transfer some of your assets to your grandchildren while also teaching them valuable financial skills? Opening a UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act) account could be the perfect solution. Not only do these accounts allow you to gift assets to the younger generation, but they also serve as an excellent educational tool for imparting important lessons about investing and financial management. Here’s how you can make the most of this opportunity to both give and teach.
What are Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts?
- These types of accounts are custodial accounts which allow you to invest on behalf of a minor until they reach the age of majority. The age of majority is usually either 18 or 21, determined by the state of residence of the custodian.
- UTMAs and UGMAs allow financial investments, but UTMAs also allow property such as real estate. UTMAs may be the only option when opening a new account. Vermont and South Carolina residents can only establish new UGMAs.
Why use this type of account?
UTMAs and UGMAs can transfer wealth to a grandchild, of course, but you can also use them as a learning tool to provide financial education. Gifting even a small amount of money to a UTMA or UGMA and passing along your investment knowledge can give your grandchild a gift more valuable than money that will last a lifetime.
How are UTMAs/UGMAs taxed?
This account is owned by the child, so earnings are generally taxed at the child’s assumed lower tax rate instead of the parent’s rate. This is the power of this type of account.
What is the impact on Financial Aid?
Since these are the child’s assets, there is an expectation that more funds of these funds would go toward the child’s education. Saving for College indicates “20 percent of a student’s assets are counted on the FAFSA, 25 percent are counted on the CSS Profile. Any interest, dividends or capital gains reported on the student’s income tax return is also counted as income on the FAFSA and assessed at 50 percent.” Note: This is not tax-advantaged like a 529 plan.
How can you use the funds in a UTMA/UGMA?
This account can be used for anything! Whether these funds are earmarked for your grandchild’s first car, a downpayment on a home or kickstarting their funds for retirement, these assets will continue to be invested for their goals. If the focus is specifically on education, a 529 Plan may be a better choice in some circumstances, however.
What happens when the grandchild turns the age of majority?
While the grandchild is the minor, you will continue to manage and invest in the UTMA/UGMA. After the age of majority, the grandchild takes over ownership of the account, and it becomes their individual account. This is where the knowledge and financial skills they have learned from you help them to become a responsible and informed investor for their future success.
Where Can You Open a UTMA/UGMA Account?
Ready to get started? Here are three reputable custodians where you can open a UTMA/UGMA account today:
- Vanguard: Known for its low-cost index funds and long-term investment philosophy, Vanguard is a great option if you’re looking to minimize fees while teaching your grandchild about diversified investing. Open a UTMA/UGMA with Vanguard.
- Schwab: Charles Schwab offers a user-friendly platform with a range of educational resources, making it a good choice for grandparents who want to engage younger family members in managing their investments. Open a UTMA/UGMA with Schwab.
- Fidelity: With a strong emphasis on financial education and planning tools, Fidelity is ideal for those who want to teach their grandchildren about investing while providing a wide array of investment options. Open a UTMA/UGMA with Fidelity.
Opening a UTMA or UGMA account for your grandchildren is a wonderful way to contribute to their financial future while also passing on essential money management skills.
Interested in other ways to financially support your loved ones? Check out our article on 5 Ways to Give Your Godchild (or Loved One) a Financial Boost
