Your excellent financial planning and thinking ahead may get in a way of a child’s financial future when you give them money in a custodial account. Uniform Transfer to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA) are custodial accounts that children can access once they reach adulthood.
Loving parents, grandparents and other relatives surely have a child’s best interests at heart when they set up custodial accounts in a child’s name but as Troy Von Haefen, CFP® points out, this may have “unintended consequences.”
In “UTMA and UGMAs: What are they?” Van Haefen discusses just why you should think carefully about these accounts. For one thing, if the child gains access to the money at the age of majority, they may not spend it wisely, despite your good intentions.
Another complication connected to custodial accounts is that they may be subject to taxes (depending on your state). They are also used to calculate finances during the financial aid process when someone applies for college. In fact, Von Haefen writes “UTMA and UGMAs are considered the child’s asset when it comes to the financial aid process for college, which can hurt the financial aid process much more than assets in the parents’ name.” You certainly would not want your gift to get in the way of much-needed financial aid for college.
Of course custodial accounts are not all bad and there are some good reasons to open one up for a child in your life. However, before you do this, you can consult with a financial advisor to see if this is the best course of action for your situation. You can also work with a Fee-Only financial planner to get your finances in order and save money so that you can contribute to a child’s college expenses or work on estate planning that allows you to ensure that you have resources to give when a child has reached maturity.