Your child has just turned 21, and it is time to celebrate.
Your family and friends have come together for dinner, a birthday toast, and to deliver a few choice presents to mark the occasion. However, lurking in the background is another “gift” that some parents may have forgotten about – the UTMA account which they established years ago has just converted to a traditional investment account, and sole ownership has transferred to their child.
From the child’s perspective, they are most likely attending college, with no stable source of income, and possibly no knowledge of the UTMA’s existence. The value of these accounts usually range from tens of thousands to hundreds of thousands in investment assets, and when confronted by these numbers, children may be astonished to realize that this money is now in their sole possession. For many, the realization can be quite intimidating.
From the parents’ perspective, there are often fears that come with transferring wealth to their children. These concerns typically fall along the lines of: “Will they blow the money on unwise purchases?”, “Will they be less incentivized to work when they come Into possession of these assets”, “Will they be prepared to manage the account?”But for some parents, funding a UTMA account is a way to address these concerns, while providing their child invaluable experience in managing their their own money.
The transfer of UTMA ownership from parent to child occurs automatically on either the child’s 18th or 21st birthday, depending on the state, but for the child to take ownership of the account, paperwork must be signed by both parties. This presents an opportunity to hold an open dialogue about the assets – what they are, where they came from, and what they were Intended for. Whether the funds were set aside for school expenses, to assist with housing or for any other purpose, the stage is set for parents to discuss what the purpose and value of money is with their child, including their perspective on responsibility and long term goals. The conversation will be extremely beneficial for the child as well, who will likely be learning about asset management, risk tolerance and cash flow, in real terms, for the first time.
An additional, crucial facet of the financial education yielded by the transfer of control of the UTMA account, is budgeting, as the child will now be in a position to manage and pay many, if not all of their own bills. With assets now in their direct control, the child can develop a skill set that will prove invaluable when they graduate college, and for the rest of their life.
The UTMA transition from parent to child comes with concerns on both sides, but if handled head on, through open and honest conversation, many positive outcomes can be expected on both sides.
