It’s generally not a good idea to hand large chunks of money to a child. That’s why the Uniform Gift to Minors Act and its newer version, the Uniform Transfer To Minors Act, are frequently used by parents and others to put money away for a child’s use when they come of age. As the custodian of a UTMA/UGMA account, a parent can withdraw money whenever needed to benefit the child.
Using the Account
The child is the beneficiary of a UTMA/UGMA account. Each state has adopted its own version of these accounts, but generally, beneficiaries can access their UGMA money at age 18 and UTMA cash at age 21. These accounts are popular ways to save for a child’s college costs. However, the parent or custodian does not have to use the money for education. The rules typically call for the money to be spent for the benefit of the beneficiary, and this is taken to mean costs other than those normally paid by parents, such as food, shelter and clothing. You might have no problem with withdrawals as long as you can show the benefit to the child beyond normal parental obligations.
The gifts made to a UTMA/UGMA are irrevocable – a child cannot simply return them to the giver. However, a parent is allowed to transfer the funds to another custodial account for the minor’s benefit, such as a 529 college savings account. A good reason to make this transfer is that UTMA/UGMA money belongs to the minor and can have a major, and negative, impact on the amount of federal education aid offered to the minor. The same money in a 529 account is credited to the parent, not the minor, and therefore has only a small impact on federal education aid.
While a parent or custodian can withdraw UTMA/UGMA money at any time for the minor’s benefit, the timing can be important as the minor approaches college age. As students begin planning their college careers, they will probably fill out a Free Application for Federal Student Aid, or FAFSA. It’s at this point that parents might first understand how UTMA/UGMA money reduces the amount of available aid. An attempt at this stage to empty out the account might look like a clumsy attempt to qualify for more aid and might actually hurt the student in the long run. You should seek qualified advice before cashing out a UTMA/UGMA account within a year of a FAFSA application. In addition, some states prohibit parents from closing UTMA/UGMA accounts just before a child reaches that state's legal age of adulthood.
Not all kids will attend college, and some minors take a long time to “grow up.” If you are concerned that your child falls into this category, you might consider transferring the UTMA/UGMA account to a spendthrift trust, which allows the trustee to control the distribution of money. These trusts can be structured to withhold money until the beneficiary reaches a certain age or achieves a specified life event. The state laws covering this kind of transfer vary, and an experienced lawyer will be a valuable asset as you work out this plan of action.