Setting up a Uniform Transfers to Minors Act (UTMA) account for your child sounds like a smart move. It’s a straightforward way to save for the future, letting you transfer assets to a minor without setting up a trust. But as your child nears 18, the age of majority in many states, these accounts can bring unexpected headaches. What seemed like a generous plan can quickly become a source of stress, conflict, or regret. Before you open a UTMA account—or if you already have one—it’s important to know the common UTMA mistakes that can backfire right as your child becomes an adult. Understanding these pitfalls can help you plan smarter and avoid unnecessary surprises.
1. Loss of Parental Control at Age 18
One of the most significant UTMA mistakes is not realizing that control shifts to the child at the age of majority. In most states, that’s 18 or 21. If your child isn’t ready for the responsibility, they can spend the money however they want—on anything from tuition to luxury purchases. There’s no legal way to restrict their choices, even if you hope the funds would be used more wisely. For families who want to guide how and when the money is used, this sudden loss of control can be a major downside of UTMA accounts.
2. Impact on Financial Aid Eligibility
UTMA accounts are considered the child’s asset, not the parent’s. When it comes time to fill out the FAFSA for college, these assets are weighed much more heavily against financial aid eligibility. The result? Your child could receive less need-based aid, making college more expensive than expected. This is one of the most overlooked UTMA mistakes, and it can catch families off guard right when they need funds the most.
3. Tax Surprises for the Child
Many parents don’t realize that income generated by UTMA accounts can trigger the “kiddie tax.” Once your child turns 18, the tax situation can shift, and substantial earnings might push them into a higher tax bracket. If the account holds appreciated assets like stocks, your child may also face capital gains taxes when they sell. Those unexpected tax bills can eat into the savings you worked hard to build.
4. No Flexibility for Special Needs
If a child has special needs, a UTMA account can create problems. Once the child reaches the age of majority, the assets could jeopardize eligibility for government assistance programs like Medicaid or Supplemental Security Income (SSI). For families in this situation, a special needs trust may be a better fit. UTMA mistakes in this area can have long-term consequences for a child’s well-being.
5. Unintended Use of Funds
At 18, your child might not have the maturity or financial literacy to make sound decisions. There’s nothing to stop them from draining the account for non-essential expenses—think cars, vacations, or risky investments. What was meant to help with college or a first home can vanish in a flash. This risk is real and often underestimated by well-meaning parents.
6. Family Disagreements and Tension
UTMA accounts can cause friction between parents and children, or among siblings. If expectations weren’t clear, or if one child receives more than another, it can lead to resentment. These accounts are also public record, so other family members may find out what was given, leading to further disputes. Avoiding UTMA mistakes means having open conversations and clear documentation from the start.
7. Complicated Estate Planning
When assets are transferred into a UTMA account, they belong outright to the child. This limits your flexibility in estate planning. You can’t redirect the funds or change your mind about who receives them. If circumstances change—such as a falling out or a child developing financial problems—you have no legal way to reclaim the assets. This lack of flexibility is often overlooked when opening a UTMA account.
8. Exposure to Creditors and Lawsuits
Once your child becomes the legal owner of the UTMA account, those assets are vulnerable. If they face lawsuits, divorce, or creditor claims, the money can be seized. There are no built-in protections like you’d find with a trust. For families concerned about shielding assets, this is one of the most serious UTMA mistakes to watch out for.
9. Not Coordinating with Other Gifts or Savings Plans
It’s easy to forget about the bigger financial picture. If you’re also funding a 529 plan or making other large gifts, a UTMA account could complicate things. Contributions count toward annual and lifetime gift tax limits, and they may overlap with other college savings strategies. Failing to coordinate can lead to inefficiencies, missed tax advantages, or even IRS headaches.
Planning Ahead: Smarter Moves with UTMA Accounts
UTMA mistakes can be costly, especially as your child approaches adulthood. The best way to avoid these pitfalls is to plan ahead and weigh all your options. If you want more control, a trust or a 529 plan might be a better fit. Talk with your child early about financial responsibility and make sure they understand the purpose of the account. If you already have a UTMA account, review it annually to ensure it still aligns with your family’s goals. Understanding how UTMA accounts work at age 18 can help you make informed decisions and safeguard your child’s future.
Have you had a UTMA account transfer go smoothly—or not so smoothly—at age 18? What would you do differently? Share your experience in the comments below.
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The post UTMA Mistakes: 9 Ways These Accounts Can Backfire at Age 18 appeared first on The Free Financial Advisor.
