College Savings: UGMA Financial Aid Impact

When it comes to saving for college, there are many different opportunities available for families. In addition to understanding the different financial vehicles available for college savings, it’s important to know the impact they have on the college financial aid application process. Let’s take a look at on such college savings vehicle, the UGMA.

College Financial Aid Impact: UGMA

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What is an UGMA?

UGMA stands for the Uniform Transfers to Minors Act, which is a law that allows individuals to transfer property or assets to a minor without the need for a formal trust. Under UGMA, a custodian is designated to manage the assets until the minor reaches the age of majority (usually 18 or 21, depending on the state).

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UGMA Pros & Cons

One of the benefits of UGMA accounts is that they can provide a way for individuals to transfer assets to a minor while avoiding the need for a formal trust, which can be costly and time-consuming to set up. However, it's important to note that once assets are transferred to a UGMA account, they are irrevocable and cannot be taken back by the donor.

Another important thing to keep in mind is that UGMA accounts have tax implications. While contributions to UGMA accounts are not tax-deductible, any earnings or capital gains generated by the assets in the account are subject to taxes. Additionally, once the beneficiary reaches the age of majority, they may be subject to gift and estate taxes if the value of the assets in the UGMA account exceeds certain thresholds.

Overall, UGMA accounts can be a useful tool for individuals who want to transfer assets to a minor without the need for a formal trust, but it's important to carefully consider the tax implications and other factors before setting up an account.

UGMA Financial Aid Impact

Since an UGMA is in the name of the minor, which is generally a student applying to college, the total amount of the UGMA needs to be considered as a student asset for financial aid reporting purposes. When it comes to financial aid need calculation and determining a family’s ability to contribute to the cost of college, it is generally far better to have an asset in the parent’s name versus the student’s name. The college will expect more of a student asset to be contributed to the school expenses compared to a parent asset. For this reason, an UGMA can greatly increase a family’s expected contribution versus a 529 plan, which would be considered a parent asset.

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There is a lot to be gained from our free general financial aid advice, but it’s also a very individual process. If you have remaining financial aid questions, email us to discuss more or book an individual session.