How Much Should You Fund a UTMA?

UTMA for Children from Grandparents


A Uniform Transfer Minors Act (UTMA) is the best place to put money from grandparents’ gifts that an older child might better spend.

How much should you fund a UTMA? Assume you have 529 college savings plans adequately funded (whatever that means to you), you don’t want more stuff crowding the house, and the child’s physical piggybanks and treasure chests are full. Can you do better than a child’s savings account at a local bank?

UTMAs are for children and can be funded from grandparents’ cash and cash-alternative gifts.

Since an older child will spend both, we will discuss UTMAs and 529s first.


UTMAs and 529 Plans

Don’t fund a UTMA until a 529 college savings plan is considered. If your child is not going to college, a 529 is likely not indicated. If they are, your first stop is a 529.

Don’t overfund the 529. Not every young child should go to the brinks-and-mortar cost increase to-the-moon eyesore presently seen. So, instead, consider a 529 funding goal of 100k or 250k and call it good. But wait, does that include grad school or not?

Or, I will probably do what I do: take out student loans for 1/3, a 529 for 1/3, and use cash flow for 1/3.

The UTMA is to provide some support when they are in their 20s. So why not pre-pay those expenses from the gifts of grandparents?


Grandparent’s Gifts fund UTMAs

Before discussing how much to fund a UTMA, let’s discuss the funding source: gifts from grandparents.

I have an excellent blog on how grandparents can give to their grandchildren, but for now, let’s move on.

Some grandparents fund 529 plans, and some give life insurance policies, watches, rings, or real estate. Who is to say? But as money is fungible, it depends on the goals of the money.

How to Open a UTMA

Opening a UTMA is not the most uncomplicated process, but you are irrevocably transferring money.


What Information do you Need for a UTMA Application?

  • Name and Contact Information
  • Social Security Number
  • Your child’s Social Security Number
  • Your birthday
  • Your child’s birthday
  • Employment information (leave blank for child)


How Much to Fund a UTMA

So, to know how much to fund the UTMA, we need to understand the purpose.

First, we want a better place than a bank savings account to grow the children’s money for 10-20 years. I think a low cost broadly diversified ETF fits the bill. I use VTI.

Next, fund the UTMA when you have the time to gather all the paperwork and a couple of checks or cash-equivalent gifts. Then, plan to sell it or actually have your child sell it when it is theirs after 21 years of age.

But here is the real question: how much do you want to give them the key along with their 21st birthday card?

What is a UTMA?

UTMA (Uniform Transfer to Minors Act) is like a UGMA (Gift). They are after-tax brokerage accounts with no contribution limits. Along with a couple of other accounts, they are called custodial accounts.

The reason you start this custodial account is to save on taxes. Earnings from the UTMA are exempt from federal income taxes for the first $1100, and the next $1100 is taxed at the child’s federal tax rate (10% to start).

It is a Transfer, not a Trust

While unearned income is subject to trust tax rates, the T stands for transfer, not trust, and the G in UGMA stands for gift.

So a UTMA is an irrevocable gift or a money transfer to a minor that will become theirs when they are 21 or so.

Despite not being a trust, there is still a fiduciary duty to manage the account well for the child, the custodian.

The UTMA may be spent on anything that will benefit the child, such as tutoring, summer camp, etc.


Considerations before Opening a UTMA

What do you need to consider before opening a UTMA?

Irrevocable Gift

The money is irrevocably given, and the minor takes possession at the age of majority. Once they have the money, it can be spent any way they want

No Limit, but you May Need to File a Tax Form

Contributions are unlimited, but if you go above the 16k (32k for couples), you must submit a form to the IRS by tax time. In addition, if individuals exceed the 16k mark, they may use up some of their $12.06M federal lifetime gift-tax exclusion limit (2022).

Unearned Income

This is an after-tax brokerage account, so earnings are subject to ongoing yearly taxes, and income is considered unearned by the IRS. The kids get the earnings, so unearned income above $2200 hits trust and estate tax brackets. That is not ideal. Generally, parents will include the income on their return above 11k.

Financial Aid

UTMAs are considered assets owned by the child. Therefore a full 20% of the UTMA will be counted on the FAFSA rather than the parental rate of 5.64%. So if you want your child to receive financial aid in the future for college, maybe reconsider a UTMA.

Kiddie Tax

Kiddie Tax needs for college it’s own headline.


UTMAs and Kiddie Tax

Earnings are taxed at the kid’s rate for about the first 2k and then at your highest marginal rate. This is the famous kiddie tax, where the UTMA unearned earnings go from 10% to 35% or higher.

This is why you must invest tax-efficiently to have a sizeable UTMA.

For example, assume an ETF has a 2% qualified dividend a year, you would need to have a UTMA larger than 100k before kiddie tax kicks in and the tax rate goes above 10%.

For jumbo accounts larger than 100k, you can always lower the taxable income by investing in I-bonds, Zeros, or Munis. Or an IOVA?

The goal is to have your child pay the embedded long-term capital gains during their low-income years of their 20s when they have access to their 0% long-term capital gains tax bracket.


UTMA Details

Where should I open a UTMA?

Wherever you already have other brokerage accounts.

Do I need to understand how to buy an ETF to open a UTMA?


Tax Gain Harvesting a UTMA

Since the first thousand dollars of gains are tax-free in a UTMA, you can tax gain harvest the UTMA when you first start. Eventually, you need to worry about getting into trust income limits. Trust and estate tax rates hit 37% on trust income above $12,750, compared to massively higher income for ordinary income tax rates. So, while you need a very large UTMA to hit the 37% bracket, understand the trust and estate tax brackets if you have one.


Alternatives to UTMAs

Savings accounts

It’s easiest to open, but less tax efficient and will grow slower over time.


See above

Retirement accounts

A custodial Roth IRA is a home run at any age if they have earned income.

College accounts

A 529 makes sense if there is a possibility that they will go to college. I like 529s, and I opened one as soon as my children had social security numbers.


Conclusion- How Much Should You Fund a UTMA?

A UTMA is a tax-friendly way to pre-pay a child’s expenses in 10-20 years. It also lets me funnel gifts from grandparents into bank savings accounts and toys into VTI.

The plan is to use it to teach them about investing. I see shares of Disney in my future. What an excellent way to introduce common sense investing.

Remember, if the unearned income from your child’s UTMA exceeds $2,200, you’ll have to pay the extra taxes at your marginal tax rate. Keep the income less than ~$11,000 per year, and you can keep it on your taxes rather than resorting to estate and gift tax rates.

Every parent will have different reasons to consider a 20s fund and various funding sources.

That is fine.

Finally, it is ok to buy 100% VTI and not worry about when your kid will sell it. It can be that simple. So don’t let the question of what to invest in or when the ETF will be sold prevent you from opening this account. Put loving gifts from grandparents to work.

The flipside: when the child has complete control, they might waste the money or worse.


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