A 529 UGMA savings plan is an account intended for covering college expenses. UGMA means Uniform Gift To Minors Act. The regulations governing this type of account are set by the state. It is a custodial account that is set up by the parent for the benefit of the minor child. Usually at age 18, the account leaves the hands of the parents or donor and becomes the property of the minor. Some states differ regarding the age factor. For the duration of time in which the 529 UGMA funds are controlled by the parent, the funds are taxable. Those monies are to be recorded on the tax return of the minor and fall under particular child tax regulations. Most of these accounts are set up at broker firms or banks.
Once the UGMA custodial account is turned over to the beneficiary, the parents (or donors) can’t exact any rules or boundaries on the money. Although the account is intended for the child’s education – once the child becomes an adult he is free to use the account funds from the 529 UGMA for any purpose and the parent cannot take back the money under any circumstances because the account is deemed a gift from the donor. The custodian or trustee over the money can not use any of the money for his own use or transfer the account to his name. This is illegal. The account is actually owned by the child from the onset. In light of this, the donor must be sure that this type of account is the right solution for saving college expense money for the child. Any money from the 529 UGMA savings account which is spent before the child has reached adult age must be used for the sole benefit of the child. This spending does not include parental obligations such as food, shelter, clothing, or health care. It only includes educational expenses.
Note that the age of termination (which is the age in which the beneficiary takes control over the savings account) is not necessarily the age of majority for contract signing. There’s also another type of custodial account called a UTMA account (Uniform Transfer To Minors Act). This account differs from the 529 UGMA in that the minor can also own real property, royalties, and patents. The UGMA is not as flexible as the UTMA.
Before you, as a parent or donor, decide to open a 529 UGMA savings account, be certain that you are in total agreement with the stipulations and hindrances concerning your control over the funds.
