Clients came to me for advice about saving for their children’s college education. They didn’t know why their prior advisor recommended they set up an UTMA account and a Section 529 college savings plan for each child. During our discovery process, the clients explained that they did not want their children to have access to any of this money when they turned 18, which is what would happen with the assets in the UTMAs.
Based upon the clients’ goals, the UTMA assets were inappropriate. These assets were subject to income and capital gains tax, and transactions required a tax return filing, further eroding the family’s wealth and increasing the cost of this savings strategy. Conversely, the assets, earnings, and growth in the 529 plans are always tax-free, as long as withdrawals are used to pay higher education expenses. With our help, the clients spent down the UTMA assets on school tuition and summer camps, and we created a savings plan to fund the 529 accounts each year.
For most people, 529 plans are the best way to save for college. They are low-cost (no set-up fees, no tax returns to file), and control remains in the hands of the individual who sets up the account, rather than the child. However, if your family’s situation is unique (perhaps you can contribute a very large amount) or you have goals for the gift other than college, a trust or UTMA may make sense.
The above tip is excerpted from an article comparing 529 plans and UTMA accounts published in CalCPA magazine.