I’m Doing What Most Parents Are Scared To — Handing My Son a Pile of Cash When He Turns 21. Here’s Why

A photo of Pamela Capalad with her husband and son Photo courtesy of Naomieh Jovin
Pamela Capalad, pictured here with her son and husband, recently set up a UTMA brokerage account for her son. A UTMA account is one way for adults to gift assets to minors without setting up a trust.
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“So, you’re really, really OK with him getting the money at 21?” I asked my husband for the 10th time as we were about to open a UTMA (Uniform Transfer to Minors Act) brokerage account for our son.

“Yeah, why not?” He shrugged for the 10th time. He looked at me. “It’s just one account we’re giving to him. If he makes some mistakes around it, that’s OK. The goal is for us to have other assets to be able to pass down to him anyway.”

I pause. No one has ever put it like this before. 

As a certified financial planner, I’ve seen UTMA accounts fall out of favor with my wealthy clients. One of the main reasons is because they don’t like the idea of their kids just getting a pile of money at age 21.

Instead, they have attorneys write complicated trusts that distribute assets in portions, include spendthrift clauses, and have other stopgaps to make sure their children don’t “blow” their trust fund.

My husband reminded me why we’re giving this money to our son. It’s not because we “trust” him to be responsible with the money (that’s a lot of pressure to put on future him and future us!). It’s because we want to give him the gift of having room to explore, take risks, and make mistakes. This is what wealth means for us.

We opened a UTMA account that morning.

What Is a UTMA account?

A UTMA account — also called a custodial investment account — is a way for you to gift assets to minors without setting up a trust. It’s like a shortcut trust fund. You can name anyone over 18 as the custodian, but usually it’s the parent. 

There’s no limit to how much you can contribute to a UTMA, but you will need to file a gift tax return if you contribute more than $16,000 in one year. 

Once you put the money in a UTMA account, it’s irrevocable, which means it belongs to the child and you can’t take it back. You  can’t use the UTMA account to cover expenses you’re already responsible for as a parent, such as food, shelter and clothing. 

You can, however, withdraw from a UTMA account to pay for extracurricular activities, travel, summer camps, and other expenses outside of the basics.

Once the child turns 18, 21, or 25 (depending on what state you’re in), the ownership of the account transfers to the child and the custodian is not allowed to withdraw money from it ever again.

This is the part that often gives most parents (including me!) pause. As you think about your own children and the financial values you want to pass on to them, get clear on why you are gifting the money to your children in the first place. 

Don’t Get Scared Off by Taxes — They’re Not as High as You Think

If you search online for “UTMA”, you’ll most likely see UTMA/UGMA pop up. UGMA (Uniform Gifts to Minors Act) accounts were the original UTMA accounts. They were created in 1956 as a tax shelter via gifting money to your children. UGMA accounts would be taxed at the child’s tax rate, which was usually zero.

In 1986, the UTMA was established, most states adopted it, and the kiddie tax was born. The kiddie tax closed the loophole and put a cap on how much of the UTMA account’s earnings could be taxed at the child’s tax rate. 

In 2022, the first $1,150 of unearned income is tax-free, the next $1,150 is taxed at 10%, and any unearned income above that is taxed at the parents’ marginal tax rate, which, many articles love to remind us, can be as high as 37% (if you make over $647,850 married filing jointly).

Seems like a lot, right?

I spent an afternoon digging through tax forms because something about “parents’ marginal tax rates” didn’t seem right to me. 

A UTMA account is essentially a brokerage account with a tweak on the ownership. If you buy stock in a brokerage account, hold it for over a year, and sell it for capital gains, you pay long-term capital gains tax. 

Unless you make over $517,200 married filing jointly, long-term capital gains tax is 15%, not too far off from the child’s 10% tax rate. If you make less than $83,350 married filing jointly, your long-term capital gains tax rate is 0%. 

I filled out tax form 8814 and confirmed that any capital gains you have from the UTMA account are taxed at the capital gains tax rate.

Make sure you consult with your accountant to get the final verdict on taxation, especially if you want to invest in assets beyond stocks and bonds.

Speaking of Investments …

We opened a UTMA account for our son at a self-directed brokerage with $0 trading fees, which meant we had to choose the investments ourselves. We knew we wanted to invest in a social justice exchange-traded fund (ETF), but even as a financial planner and financial educator, I stumbled through the site to figure out how to buy the ETF. 

If you’ve never purchased a stock, bond, mutual fund, or ETF before, it can feel overwhelming. However, picking your investments doesn’t have to be complicated. NextAdvisor recommends investing in low-cost, broad-market index funds or ETFs, which are bundles of stocks that track a particular section of the stock market. For example, the S&P 500 is a popular index fund made up of the 500 largest companies in the stock market.

Index funds and ETFs provide an easy, low-cost way to diversify your investing portfolio. Having a diversified portfolio is an important way to manage risk, so that if one particular company or sector tanks, your entire portfolio won’t suffer too much. Dollar-cost averaging is another strategy that can help you weather the market’s volatility so your money can grow long-term.  

If you’re nervous about choosing your own investments, there are a handful of companies that offer UTMA accounts and custodial accounts where they automatically invest the money in preset investments. These companies include UNest, EarlyBird, and M1, and they all charge a small monthly fee. 

Closing the Gap

Not every family has the ability to invest for their kids, but some politicians are trying to change that with Baby Bonds.

Under this proposed policy, every child born in the US would receive a government-issued trust fund of $1,000. Based on the family’s income, up to $2,000 would be added to the trust fund every year, invested by the Treasury in low-risk assets.

Account holders could access the funds at 18 and use the funds for education, homeownership, and retirement. A trust fund of up to $45,000 would be created for the lowest-income children.

White families, on average, currently have 10 times the wealth of Black families. A report by CUNY professor Naomi Zewde found that a baby bonds policy would come close to eliminating that racial wealth gap.

The Baby Bonds policy has been championed by U.S. senator Cory Booker since 2018 under the Opportunity Accounts Act. Washington DC is currently piloting a Baby Bonds program for their residents and Baby Bond proposals are in the works in Wisconsin, Washington state, and Massachusetts.

How to Know If a UTMA Account is Right for Your Family

A UTMA account is not for every family. When it comes to choosing the right type of account for your child’s future savings, ask yourself these 3 questions:

1. How do I want to pass on my values to my child?

Seventy percent of wealth is lost in the second generation and 90 percent of wealth is lost in the third generation. One of the biggest reasons why is that we pass on our wealth, but don’t share our values alongside it. 

Before setting up the account, ask yourself what you want the money to do for your child. 

Do you want to give your child the ability to buy a home, pay for a wedding, or start a business? Do you want them to know they can always come to you in a tough financial situation, no questions asked? Do you want to give them the option to take a lower-paying job for a cause they believe in?

Share your values with them so they can integrate them into their values and goals as an adult.

2. How much control do I need to have over this money when my child is an adult?

UTMA contributions are irrevocable. And, unlike 529 plans, you cannot change the beneficiary. It’s hard to know at age 3 if you’re going to feel comfortable with how your child is going to handle money at age 21. 

If you are someone who wants to wait until your child is older to be responsible for a potentially significant amount of money, you may want to instead look into setting up a trust. 

If you want to make sure your child makes education a priority, it might make more sense to explore 529 plans, which can only be used (penalty free) for educational expenses. 

If you’re still not sure, you may want to open a savings or brokerage account under your name and label it for your child. 

3. How and when do I want to involve my child in the process?

We may not be able to talk to our 3-year-old yet about UTMA’s, but we’ve already started talking to him about money. As he gets older, we’ll be able to build on these early conversations so that by the time we are ready to get him involved in the UTMA account, it will feel like a natural conversation. 

If you are planning to open an account like a UTMA, it’s most effective when you involve your child in the investment process.

You can use the UTMA as a tool to teach your child about investing and also get them to explore their values, goals, and wants. They can learn about capital gains, paying taxes, and taking losses in this safe container.

We’re excited to give our son a foundation to build wealth in alignment with our family values and a UTMA account is one of the many ways we are going to do just that.