Custodial Accounts

Are you considering opening a custodial account for a minor child? You can open two such accounts, the Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts, in most states, but you should be aware that they differ and are not for everyone.

Differences

An UTMA account accepts most assets, but you can transfer only cash, insurance and securities into an UGMA account. While you won’t own assets transferred to either account you can act as its custodian (as can a financial institution or advisor) and use assets for certain benefits of the minor child who is a beneficiary.

Similarities

The two accounts are similar because gifts made to an UGMA or UTMA account are irrevocable — your child owns whatever you transfer into the account the moment you transfer it. Once reaching the age of majority in your state, typically 18 or 19, your child can do whatever with the funds. You might have wanted the account for college expenses, but your child can take the money and head to Europe instead.

Alternatives

Because ownership and tax (see Tax Changes Affect all Ages article) issues may make other savings alternatives more attractive, you may want to consider other options, including a 529 plan. Talk to an advisor to learn more.