Giving Up Control
We have some of these old accounts still out there. They’re called UGMA accounts or UTMA accounts. That stands for Uniform Gift to Minors Act or Uniform Transfer to Minors Act. Long before we had these special education accounts that we have now, these were used—mainly by grandparents—and their intention was to use that money for education. The problem is, there are very few limits on how that money can be used.
You’re going to have two people on those accounts. One will be the custodian. That’s going to be the signer or the adult on the account. They’re allowed to use the money only FOR the minor. Again, this is usually a parent or a grandparent. The money does not belong to the custodian. That’s very important.
Then, you have a beneficiary. That’s going to be the minor or the child. And once the money goes in, legally it belongs to the minor, and the custodian can’t take the money back. The money can only be used for the minor, but, again, it can be used for a wide variety of needs. So, it’s very flexible.
What happens when that child becomes an adult? In Mississippi, that age is 21. Officially, then, (legally) that money belongs to the child—to the beneficiary. They really need to open a new account and turn those funds over.
What we see happening, though, is many of those custodians just don’t tell the beneficiaries that they’re there. That’s really not appropriate, because what happens when that money goes to those adults now who were children? They can spend the money as they please. Many times it was intended for education, and suddenly they can just blow it all on whatever and you have no control. But that’s the way the law works.
How do you prepare for that loss of control? Try to use up as much of that money as possible before they reach adulthood. Begin early by teaching them about financial management.
Now that we have some of these new types of plans, use these other accounts like a 529 plan. Here in Mississippi we have an MPACT plan and a MACS plan that are specifically for education—Education Savings Accounts. So you have limits on what that money can be used for. Or, you can just save in your own name so you have more control.
Bear in mind that if you have some of those old UGMA accounts out there, when that child reaches 21 (the age of majority), that money is legally theirs.