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Gifting to Children: UTMA and 529 Plans

Gifting to Children

There are several different ways to gift to children. One, of course, is simply to gift the money to the child outright. However, if the idea of gifting $14,000 to a child is an uncomfortable one (as it understandably may be), there are other options that will enable you to maintain more control over the gift.

The UTMA Account

The first option is to establish a custodial account (also known as a UTMA account, after the Uniform Transfers to Minors Act, which makes the account possible). Under this type of account, the donor is able to gift money into the account established in the child’s name. The child is considered the owner of the gifted property, but it is held, managed, and distributed by the custodian named when the account was originally established. When the child reaches the age of majority (age 18 in California), the property passes to the child outright. The distribution can be delayed beyond age 18 to age 21 (up to age 25 in California if established under a will or a trust) by adding the words “until age 21” in the account title. There is no contribution limit for UTMA accounts; however, it is best to keep your annual contribution at or below $14,000 (the annual gift tax exclusion limit), so that the contribution is not subject to gift tax requirements.

When setting these accounts up there are a few things to keep in mind. First, any money in custodial accounts for which you are the custodian are counted as part of your taxable estate if you are the parent or legal guardian of the child, and the child has not yet reached the age of majority or age of distribution. Thus, if you want to establish a UTMA account for your child, name someone else (not your spouse either!) to be the account’s custodian.

Second, since the account is in the name of a single child, the funds are not transferrable to another beneficiary (as they would be with a 529 plan).

Lastly, note that neither the donor nor the custodian can place any restrictions on the use of the money in the account once the minor becomes an adult. At that time, the child can use the money for whatever purpose they please, so there’s no guarantee the child will use the money for education or some other useful purpose. (This is why some parents or grandparents opt to establish a trust instead of a UTMA account, since it gives them greater control.)

The 529 Plan

The second option is to establish a 529 plan, which is basically a state-sponsored college savings plan. The key word here is college savings plan. The money in a 529 account is intended to be used for higher education purposes. While money from the account can be withdrawn and put to other uses, the withdrawn amount (and possibly the rest of the account, depending on the plan) will then be subject to income tax and a ten percent penalty. (In other words, don’t do this.) However, if the money is withdrawn for qualified education expenses (tuition, fees, books, supplies and equipment, room and board, etc.), the account’s earnings are exempt from federal income tax.

Like contributions to a UTMA account, contributions to a 529 plan in excess of $14,000 are considered taxable gifts. However, with a 529 plan, you do have the option of contributing up to five years of gifts at once ($70,000). However, if you do make 5 years of gifts at one, you cannot give that particular person any more gifts within the next five years without dipping in to your lifetime exemption (which is $5.45M per person in 2016).

The benefit of a 529 plan is you are the owner of the account; the child is the beneficiary. This means you will maintain control over the funds in the account even after the child reaches the age of majority. Furthermore, although you are the account owner, the 529 plan is considered a gift, so it is not part of your taxable estate (unlike contributions to some trust funds, or a UTMA account, if you are the custodian). The disadvantage, of course, is that a 529 plan can only be used for higher education (unless you really want to pay all those penalty fees). However, the account can be rolled over to another beneficiary as long as that person is considered a “member of the family.” A member of the family includes the spouse or descendants of the original beneficiary, as well as any siblings, first cousins, nieces, or nephews of the original beneficiary or the beneficiary’s spouse. So if, for example, one child receives a scholarship and thus has money left over in the 529 plan, the money can be rolled over into a sibling’s (or other relative’s) 529 plan.


A UTMA account is a custodial account created in a minor’s name, but administered by a custodian until the minor reaches the age of majority. Once the minor reaches age 18 (unless receipt of the account is delayed to age 21), control of the account passes to them completely, so they are free to use the money however they choose.

A 529 account, on the other hand, is used only for higher education, and is owned and administered by the person who created it; the minor is the beneficiary. This means that control of the funds does not pass to the minor it was created for, even after they have become a legal adult.

By Genevieve Hoffman 7/14/10; updated in 2016

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