College Funding Using the Uniform Gift To Minors Act

The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are sometimes called the “granddaddies” of college savings accounts.

Planning for the future of your grandchildren? Few steps more important, or helpful to your own adult children, than helping with college funding. To help fund the ever-increasing expense of obtaining a future college degree, it is worth exploring some financial tools now.

A recent piece in ElderLawAnswers.com titled “Gifts to Grandchildren: What Do UGMA and UTMA Have to Do With Grandma?” examined the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). Typically, these tried-and-true “granddaddies” of college savings accounts are established by parents on behalf of their children, and then the parents and grandparents can then make gifts of the accounts to create a powerful college fund.

Nevertheless, look before you leap. For example, “uniform” is something of a misnomer when it comes to UGMA and UTMA, since state law dictates the details. For instance, some states restrict the types of assets that can be used to fund the accounts. Utah does not limit the type of asset that may be transferred under UGMA/UTMA.

Additionally, it is also important to know that gifts or transfers made under UGMA and UTMA are irrevocable and are under the control of the custodian that you appoint.  Even if you appoint yourself as the custodian, the only control that you would have over the gift would be the power to invest the corpus of the trust.  Accordingly, competent legal counsel is a must.

Another important potential drawback is the length of time the accounts remain “custodial” under the watchful eye of the adult custodians. Once the grandchild reaches the age of majority (18 to 21, again in accordance with applicable state law), the newly minted “adult” can do as they please with the account. So, will the hard-earned savings of parents and grandparents be spent on consumerism or college tuition after the funds are cut loose?

In the end, like all things legal and financial, a cost-benefit analysis is required. While you are at it, consider educating the beneficiary of the fund about the purpose of the fund while it is being funded.

Reference: ElderLawAnswers.com (updated July 9, 2013) “Gifts to Grandchildren: What Do UGMA and UTMA Have to Do With Grandma?