Giving Money to Kids: UGMAs and UTMAs, 529 Plans, and More

Giving Money to Kids

Giving Money to Kids: UGMAs and UTMAs, 529 Plans, and More

* This article was originally published on August 12, 2020. It has been updated for 2021.

What’s the best way to give money to kids?

Whether it’s giving to kids, grandkids, nieces, nephews, or other special little ones in your life, we get this question quite a bit. So we decided to turn our three-part series on “Giving Money to Kids” into an all-inclusive piece — and a new module in our FPFoCo Academy.

From college savings and, in particular, a 529 college savings plan to other college savings strategies and gifts that are not necessarily for education, you’ll find it all right here.

Primarily, the questions we’ve gotten have focused on where the best “place” to put money for little ones is. What’s crazy about this question is that there are so many potential answers that it actually gets a little mind-numbing. From simple “mental accounting” — i.e., $X in this account is for Jr.’s college — to elaborate trusts and everything in between, the solutions are practically endless.

However, I do think there are a few strategies that won’t necessarily numb the mind and are certainly worth considering. The first thing to ask yourself when this topic comes up is, “Do I want this money to be used specifically and only for college?”

If the answer to both of those is yes, then you should really focus on the tax benefits available when saving for college.

Education Giving

The current granddaddy of investing for college is the Section 529 College Savings Plan. Because of its popularity, I want to start here, but that doesn’t mean that I think this is necessarily the best place for college savings. Let’s explore what a 529 plan is and how it works.

The 529

529 plans are state-sponsored college savings plans that allow for money to be invested on a tax-deferred basis. That means there are no taxes on dividends, interest, or capital gains when earned in the account.

When money is distributed from the account, if the money is used for qualified education expenses, it is withdrawn tax-free. Recent changes to tax law expanded the types of expenses that 529 money can be used for, which now include private K-12 education, for example.

Limits exist on the types of investments that can be used in a 529 plan — typically mutual funds and bank products — and how often those investments can be changed.

There is no federal tax benefit for contributing to a 529 plan. However, in the state of Colorado — and several other states — you can generally deduct your contribution for state income tax purposes if you contribute to a plan sponsored by the state. For the purposes of the Free Application for Federal Student Aid (FAFSA), 529 plan assets are generally treated as the parent’s assets. This is important because, under the federal aid formula, the parent’s assets are viewed as “available” for college expenses at nearly 1/4 the rate of the student’s assets — 5.64% vs. 20%, respectively — and making them less “available” means potentially more available aid.

There is good and bad with a 529 plan. Probably the top gripe I hear is the availability of investment options. When faced with this decision-making process in practice, if, for whatever reason, a 529 college savings plan doesn’t seem like the right vehicle, three other avenues are typically left to explore. Each of the three maintains some form of tax benefit, which I think is the most important consideration once you’ve decided that the money will be used for education. However, only one is specifically an education savings vehicle while the other two very much serve an alternative purpose.

Coverdell

Then there’s the Coverdell Education Savings Account. A Coverdell is somewhat of a quirky account type; look at it as a hybrid between a Roth IRA and a 529 plan with its own unique set of rules.

Up to $2,000 can be contributed to a Coverdell for the benefit of an under-18-year-old annually. The money can be invested into effectively anything a regular brokerage account could be invested in, which is much more accommodating than a 529 plan. Although the contributions are not deductible, the money in the account does grow tax-deferred and, if it’s withdrawn to pay for primary, secondary, or post-secondary education expenses, it is tax-free.

Like a 529 plan, Coverdell money can be used for private elementary and high school tuition as well as even less direct education-related expenses, like a computer for school. However, unlike a 529 plan, income thresholds may limit contributions to a Coverdell. If your Modified Adjusted Gross Income (MAGI) is greater than $110,000 or $220,000 (single or joint, respectively), you can not contribute to a Coverdell at all. Also, when the designated beneficiary reaches age 30, the beneficiary must be changed to someone under the age of 30 to avoid taxes and penalties.

Other Giving Options

IRAs

But let’s say that you’re exploring for a more creative solution and, even though you believe this money will be used for education expenses, you’re not entirely sure. Even more, let’s say that you’re not entirely sure you’d like to “give” this money to a child for any specific purpose, at least not today.

Interestingly enough, your Traditional and/or Roth IRA can serve as a pretty tidy education fund to accommodate these thoughts.

Traditional

With a Traditional IRA, you can look at distributions you take to pay for “qualified higher education expenses” for yourself, your children, or your grandchildren as a “normal” distribution, regardless of your age. This is because the circumstance is an exception to the 10% premature distribution penalty tax. 

If your contributions to the IRA were deductible or rolled over from a deductible employer-sponsored plan, like a 401(k), then the distribution is still taxable as income. If your contributions were non-deductible — and this is specifically a great use of a non-deductible IRA — then only the portion of the distribution attributed to growth would be taxed while the remainder would be treated as a tax-free return of principal.

Remember: In both cases, you also potentially have had years of tax-deferred growth.

Roth

Roth IRAs continue down a similar path as non-deductible Traditional IRAs, except for one key difference. The way the rules for distributions from a Roth IRA are written, it’s always your principal that comes out first. What this means is that you could take distributions to pay for higher education expenses — or literally anything — and those distributions would be tax-free.

Once you do go above the amount you put into your Roth IRA, and assuming any Roth IRA for you has been open for five calendar years, then your distributions are taxable. But again, there is no 10% premature distribution penalty tax because of the exception to the penalty discussed above.

Downsides to Using an IRA for Education Funding

Keep in mind that, although this can work out well depending on your circumstances, there are a few key drawbacks to using your IRA as a college fund. First, even though an IRA balance is sheltered from the federal aid formula as an asset, the distributions are treated as income and work their way back into the formula there, affecting aid for the following school year.

Second, and this is true of a 529 plan and a Coverdell, the distribution must be taken in the same year that the expenses occur. They can not be used to repay student loans or prior expenses. 

Finally, remember that the purpose of an IRA is a retirement savings vehicle. Once the money is out to pay for college expenses, it’s no longer earning returns, and the only way to get money back in is through normal, capped contributions.

Finally, we’ll look at giving money when education isn’t the primary concern. Perhaps you want to provide a financial head start to your kids once they become adults — maybe so each can start a business or buy a home. Maybe you’d even like the money to be used for college or other education expenses … but you aren’t sure if that’s the path your kids will take. 

To be candid, it’s really difficult to know exactly what will happen five, 10, or 15 years from now. The only thing you can do is consider all your options and make an appropriate planning decision with that information.

Non-Education-Specific Giving

Here is where non-education-specific gifting comes into play. In reality, only a couple of practical options exist when it comes to just flat out giving money to a minor:

1. An operation of law, called either a Uniform Transfers to Minors Act (UTMA) account or a Uniform Gifts to Minors Act (UGMA) account.
2. Placing the gift in trust for the minor, with the most common being the Section 2503(c) trust, aka a “Minors trust.”

The key distinction between the two is that the former — an UGMA or UTMA account — is very simple and virtually cost-free to establish while the later — a Minors trust — will likely require the work of an attorney.

Minors trust

Starting with the latter, a Section 2503(c) trust gets its name from the section of the Internal Revenue Code that makes its establishment an option. The purpose of a Section 2503(c) trust is to give money to a minor that he or she may not use immediately but have the gift still qualify for the annual gift tax exclusion amount, which is $15,000 for 2021. Normally, only amounts that are given in what is called “the present interest” would qualify for the annual gift tax exclusion.  

Typically, the trust will offer a period of time after the minor turns 21 for the beneficiary to remove principal from the trust. After that period of time, if property remains in the trust, stipulations in the trust document dictate how property can be removed in the future. However, after this period of time, gifts to the trust no longer qualify for the annual gift tax exclusion amount. Beyond the cost of an attorney to draft the document, probably the largest drawback to a Section 2503(c) trust is that, by default, it is taxed as a separate entity at higher trust tax rates. 

UGMA and UTMA

UTMA and UGMA

As for UTMA and UGMA accounts, all states except for South Carolina recognize an UTMA account as a form of property ownership. This is important because an UTMA account can hold virtually any asset type, including real estate. An UGMA account, on the other hand, is limited to bank deposits, securities — think stocks, bonds, and mutual funds — and insurance policies.  

Gifts to UTMA and UGMA accounts also qualify for the annual gift tax exclusion amount. With both account types, state law dictates the age at which a minor becomes an adult; in most cases, either 18 or 21 (in Colorado, it’s 21). Usually, the law of the state where the UTMA or UGMA was established or where the minor lives applies.

Taxation of UTMA and UGMA accounts falls under the “kiddie tax” rules. In 2020, the first $1,100 of unearned income is tax-free to a child, the next $1,100 is taxed at the child’s rate, and anything above $2,200 is taxed at the parents‘ highest tax rate. While this provides some tax relief, managing for tax issues is important if the account has the assets to possibly generate more than $2,200 in income or capital gains.  

For all of the non-education-specific funding arrangements: a caveat. 

Unlike the education savings vehicles and strategies discussed earlier in which a beneficiary or intended recipient can be changed, gifts to minors under the circumstances we’ve just covered here are irrevocable. With the Section 2503(c) trust, the asset belongs to the trust and, eventually, the minor. With an UTMA or UGMA account, the asset immediately belongs to the minor with an adult custodian until the child reaches the age of majority. However, in these cases, money can be used prior to the age of majority as long as it is for the benefit of the minor. This can be for education — or it can be for braces or a trip to summer camp. 

Therein lies the tradeoff: rigidity and tax breaks or flexibility and few tax benefits.

If you’d like to talk through any of the options above — or another, like making a child the beneficiary of one of your accounts — feel free to schedule a meeting. We can even guide you through setting up some of the aforementioned accounts, including preparing paperwork for you to establish a traditional IRA, Roth IRA, or UTMA. If you’re considering a section 529 plan or Coverdell ESA, let us know so we can add it to the education funding tab of your financial planning app. And if you’re planning to meet with an attorney to create a Minor’s trust, we’re happy to sit in on the meeting with you.

And don’t forget that gifting the money is only one side of the equation. What the child will do with that gift is another. If you’re looking to impart a bit of financial wisdom to your gift’s young recipient, our blogs on going from a piggy bank to the real bank and turning money education into a game may help.

Happy giving!

Ready to schedule your next meeting?

Simply head to the Meeting page where you can find and schedule a convenient time to discuss whatever is on your mind.

Jason Speciner
jason@fpfoco.com

Jason Speciner is a CERTIFIED FINANCIAL PLANNER™ professional, an Enrolled Agent, and the founder of Financial Planning Fort Collins, a 100% employee-owned and fee-only firm. He is also a member of the National Association of Personal Financial Advisors (NAPFA) and XY Planning Network (XYPN). Since 2004, he has served clients of all ages and backgrounds with unique experience working with members of generations X and Y. To learn more, check out Jason's blogs and see the media he's been featured in.



MINIMUM ACCOUNT SIZE
The minimum initial investment for the Invest:FOCO platform is only $5,000 per account. This minimum can be met via transfer of an existing account or with new funds.
ANNUAL FEE
1.00% of assets under management ($100 per $10,000 managed). Debited from your account(s).
FINANCIAL PLANNING
Strategy:FOCO financial planning services are ongoing, and include unlimited phone, email, web and in-person meeting and consultation time. Pricing is based on the unique circumstances of each client situation. Generally, there is a one-time plan development fee ranging from $500 - $2,000 and a monthly fee of $150 - $500; cancel anytime. Clients utilizing investment management services with portfolios of $500,000 or more will typically receive financial planning services for no additional fee.
INVESTMENT MANAGEMENT
Assets Under Management (AUM)Annual fee as a % of AUM or flat-dollar
$0 - $249,999(See Invest:FOCO)
$250,000 - $499,9990.90%
$500,000 - $999,9990.80%
$1,000,000 - $1,999,9990.65%
$2,000,000 - $2,999,9990.50%
$3,000,000 - $3,999,999$15,000
$4,000,000 - $4,999,999$20,000
$5,000,000 or more$25,000 + $2,000 per additional $1mm
MINIMUM ACCOUNT SIZE
There is a minimum initial investment of $100,000 per Strategy:FOCO client household. This minimum can be met via transfer of existing accounts or with new funds. A client household may generally include accounts for a head of household, a significant other, dependents, and any controlled organizations or entities.

Minimums do not apply to inStream proactive financial planning as a stand-alone service.
ANNUAL FEE
Assets Under ManagementFee as a % of AUM
$100,000 - $249,9991.00%
$250,000 - $499,9990.90%
$500,000 - $999,9990.80%
$1,000,000 - $1,999,9990.65%
$2,000,000 or more0.50%

inStream proactive financial planning as a stand-alone service: $1,000/year or $100/month
MINIMUM ACCOUNT SIZE
There is a minimum initial investment of $100,000 per Strategy:FOCO client household. This minimum can be met via transfer of existing accounts or with new funds. A client household may generally include accounts for a head of household, a significant other, dependents, and any controlled organizations or entities.

Minimums do not apply to inStream proactive financial planning as a stand-alone service.
ANNUAL FEE
Assets Under ManagementFee as a % of AUM
$100,000 - $249,9991.00%
$250,000 - $499,9990.90%
$500,000 - $999,9990.80%
$1,000,000 - $1,999,9990.65%
$2,000,000 or more0.50%

inStream proactive financial planning as a stand-alone service: $1,000/year or $100/month
MINIMUM ACCOUNT SIZE
The minimum initial investment for the Invest:FOCO platform is only $5,000 per account. This minimum can be met via transfer of an existing account or with new funds. Invest:FOCO is currently available for Individual, Joint, Traditional IRA, and Roth IRA registrations.
ANNUAL FEE
0.65% of assets under management ($65 per $10,000 managed)
MINIMUM ACCOUNT SIZE
The minimum initial investment for the Invest:FOCO platform is only $5,000 per account. This minimum can be met via transfer of an existing account or with new funds.
ANNUAL FEE
0.65% of assets under management ($65 per $10,000 managed)
TAX PREPARATION
Invest:FOCO clients are eligible for a 10% discount on income tax preparation services offered through Fort Collins Tax Service, LLC. This discount applies to the base cost for return preparation as well as Schedules B & D. More details can be found here.
MINIMUM RELATIONSHIP SIZE
There are no minimums when utilizing inStream proactive financial planning as a stand-alone service.

When investment management services are desired, there is a minimum initial investment of $125,000 per Strategy:FOCO client household. This minimum can be met via transfer of existing accounts or with new funds. A client household may generally include accounts for a head of household, a significant other, dependents, and any controlled organizations or entities. inStream proactive financial planning is then included at no additional cost.
ANNUAL FEE
inStream proactive financial planning as a stand-alone service: $1,250/year or $125/month

Assets Under ManagementFee as a % of AUM
$125,000 - $249,9991.00%
$250,000 - $499,9990.90%
$500,000 - $999,9990.80%
$1,000,000 - $1,999,9990.65%
$2,000,000 or more0.50%
TAX PREPARATION
Strategy:FOCO clients are eligible for a 50% or 100% discount on income tax preparation services offered through Fort Collins Tax Service, LLC. This discount applies to the base cost for return preparation as well as Schedules B & D. More details can be found here.
Monthly Economic Update
Stay in the loop with our Monthly Economic Update. It's a great way to catch up on the things effecting your financial plan in an easy to read and relatable format.

We promise to only use your name and email address for sending our Monthly Economic Update. We will not sell, rent, lease, loan, or use your name or email address for any other purpose, internally or externally. You can easily unsubscribe at any time.
Monthly Economic Update
Stay in the loop with our Monthly Economic Update. It's a great way to catch up on the things effecting your financial plan in an easy to read and relatable format.

We promise to only use your name and email address for sending our Monthly Economic Update. We will not sell, rent, lease, loan, or use your name or email address for any other purpose, internally or externally. You can easily unsubscribe at any time.
MINIMUM ACCOUNT SIZE
Minimums do not apply to always-on, real-time financial planning as a stand-alone service.

For investment management services there is a minimum initial investment of $125,000 per Strategy:FOCO client household. This minimum can be met via transfer of existing accounts or with new funds. Investment management fees are generally debited from the accounts to which they apply. Financial planning services are included for Strategy:FOCO investment management clients at no additional charge.
ANNUAL FEE
Always-on, real-time financial planning as a stand-alone service:  $125/month or $1,250/year

Assets Under ManagementFee as a % of AUM
$125,000 - $249,9991.00%
$250,000 - $499,9990.90%
$500,000 - $999,9990.80%
$1,000,000 - $1,999,9990.65%
$2,000,000 or more0.50%
Five Savings Secrets
Are you 30 - 60? Let us give you a few tips with our free white-paper: Five Savings Secrets. Then stay in the loop with periodic emails featuring relevant information on financial planning, investment management, and income taxes.

We promise to never sell, rent, lease, loan, or use your email address for any other purpose, internally or externally. You can easily unsubscribe at any time.
Notice

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the privacy policy. If you want to know more or withdraw your consent to all or some of the cookies, please refer to the privacy policy.

By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to the use of cookies.

FINANCIAL PLANNING
Financial planning services are ongoing, and include unlimited phone, email, web and in-person meeting and consultation time. Pricing is based on the unique circumstances of each client situation. Generally, there is a one-time plan development fee ranging from $500 - $2,000 and a monthly fee of $150 - $500; cancel anytime. Clients utilizing investment management services with portfolios of $500,000 or more will typically receive financial planning services for no additional fee.
INVESTMENT MANAGEMENT
Assets Under Management (AUM)Annual fee as % of AUM or flat-dollar
$0 - $249,9991.00%
$250,000 - $499,9990.90%
$500,000 - $999,9990.80%
$1,000,000 - $1,999,9990.65%
$2,000,000 - $2,999,9990.50%
$3,000,000 - $3,999,999$15,000
$4,000,000 - $4,999,999$20,000
$5,000,000 or more$25,000 + $2,000 per additional $1mm
ESTIMATE YOUR FEE
Your fee is determined by the complexity of your needs and situation. The primary proxy we use for complexity is your investable net worth, which is generally your total net worth, excluding your primary residence. Your investable net worth includes the value of cash, bonds, stocks, mutual funds, rental real estate, and other business or financial interests. This aligns with the holistic nature of our comprehensive services. You can use the chart below to estimate your fee based on your investable net worth. In some circumstances, your fee may be more than the minimums in the chart below.
Annual Fee Investable Net Worth (INW)
$4,000 (minimum for an individual)Up to $500,000
$6,000 (minimum for couples)Up to $1,000,000
$8,000Up to $1,500,000
$10,000Up to $2,000,000
$11,000Up to $2,500,000
$12,000Up to $3,000,000
+ $1,000per additional $1,000,000 of INW
Critical Money Tips
Need some tips to help you tackle your next critical money moment? Stay in the loop with our weekly(ish) email!

We promise to never sell, rent, lease, loan, or otherwise use your email address for any reason inconsistent with our privacy policy. You can easily unsubscribe at any time.
Critical Money Tips
Need some tips to help you tackle your next critical money moment? Stay in the loop with our weekly(ish) email!

We promise to never sell, rent, lease, loan, or otherwise use your email address for any reason inconsistent with our privacy policy. You can easily unsubscribe at any time.
Critical Money Tips
Need some tips to help you tackle your next critical money moment? Stay in the loop with our weekly(ish) email!

We promise to never sell, rent, lease, loan, or otherwise use your email address for any reason inconsistent with our privacy policy. You can easily unsubscribe at any time.
Critical Money Tips
Need some tips to help you tackle your next critical money moment? Stay in the loop with our weekly(ish) email!

We promise to never sell, rent, lease, loan, or otherwise use your email address for any reason inconsistent with our privacy policy. You can easily unsubscribe at any time.
Critical Money Tips
Do you have a cash surplus? Learn more what to do with extra money in the free-preview of our Teachable course: Sudden Money and Windfalls.

We promise to never sell, rent, lease, loan, or otherwise use your email address for any reason inconsistent with our privacy policy. You can easily unsubscribe at any time.
Critical Money Tips
Are you here because of a big change in your finances? Subscribe for our PDF on 6 questions to learn the benefits of working with a full-time fiduciary.

We promise to never sell, rent, lease, loan, or otherwise use your email address for any reason inconsistent with our privacy policy. You can easily unsubscribe at any time.
Inheriting Money Can Be Overwhelming.
We have the expertise to be your guide as you navigate receiving a windfall.
Equity Compensation Can Be Confusing.
Let us make it less complicated for you. Whether it’s a one-time award or ongoing compensation, we know how to help.
Critical Money Tips
Need some tips to help you tackle your next critical money moment? Stay in the loop with our weekly(ish) email!

We promise to never sell, rent, lease, loan, or otherwise use your email address for any reason inconsistent with our privacy policy. You can easily unsubscribe at any time.
ESTIMATE YOUR FEE
Your fee is determined by the complexity of your needs and situation. The primary proxy we use for complexity is your investable net worth, which is generally your total net worth, excluding your primary residence. Your investable net worth includes the value of cash, bonds, stocks, mutual funds, rental real estate, and other business or financial interests. Our transparent pricing aligns with the holistic nature and value of our comprehensive services. You can use the chart below to estimate your fee based on your investable net worth. In some circumstances, your fee may be more than the minimums in the chart below.
Annual Fee Investable Net Worth (INW)
$4,000 (minimum for an individual)Up to $500,000
$6,000 (minimum for couples)Up to $1,000,000
$8,000 - $12,000$1,000,000 - $3,000,000
+ $1,000per additional $1,000,000 of INW