Despite their flexibility,
UGMAs
and
UTMAs
have some potential drawbacks.
Unlike
529 plans and
education
savings accounts,
income tax is due each year on earnings
in the custodial account, and capital gains taxes are due if you
sell an asset in the account for more than its purchase price.
Gifts to these accounts are irrevocable.
You can’t take the money back once you’ve put it into
the account, even if you need the money or you change your mind
about the beneficiary.
The beneficiary has the right to take control
of the account at 18 or 21, depending on the laws of your state.
Even though you fund the account and act as its custodian, you
can’t place any conditions on how the money can be used once
the child is of age.
Estate reduction
If you establish an UTMA or UGMA
account and serve as the account’s custodian,
as is typically the case, the assets in the account
will be included in your estate if you die before
the beneficiary turns 18 (or 21). Since that could
defeat the purpose of setting up such an account,
you might decide to name someone else the
custodian.
Then there’s no issue.
Unlike
529 plans and
