An UTMA account is a custodial account defined by the Uniform Transfer to Minors Act (UTMA) for the purpose of holding cash and other assets gifted to minors. Although the child immediately has ownership of the assets, he or she cannot access them until turning age 18 or 21, whichever age the child's resident state dictates. For more information, see If You Spend Your Child's UTMA Money, You're Probably Breaking the Law and related articles on thebalance.com, as well as the article linked in the first sentence of this Legal Brief.
There are a few states where a minor's settlement money can be put into an UTMA account. Parents in those states have to be advised properly if they choose to "park" their child's money in such an account. Here is a comparison of UTMA accounts and annuities:
- UTMA account. Once the account is open, parents cannot use any of the money for anything except what UTMA allows. In other words, it's as though the money wasn't there at all, except for a few things. An advantage of a custodial account is that you can manage the money in very safe investments, such as going from a certificate of deposit at 2% interest to one at 3% interest if interest rates go up.
- An annuity. In most states, it is a necessity to put the child's money into an annuity which starts paying him when he is 18. It is a good idea to use an annuity because you can split up his payments (i.e., pay him over a period of a couple of years or more). However, the downside is that once the annuity is purchased, that's it. The money is gone and the payout dates and amounts cannot be changed. Furthermore, if interest rates rise, you cannot take advantage of them because the annuity will have already been purchased.