UGMA and UTMA custodial accounts reigned supreme over the college savings market until the creation of Section 529 accounts in 1996.  More and more investors have chosen section 529 plans for their combination of tax benefits and parental control over the assets since that time. It’s no surprise that many parents and grandparents who had previously utilized custodial accounts are feeling a little bit cheated with hat in mind, it’s no surprise that many parents and grandparents. One of the major questions asked by parents who have assets invested in an UTMA is whether or not they are permitted to convert their account to a section 529 plan. Thankfully the answer is “Yes.” However, an UTMA-529 or UGMA-529 conversion does come with some hypothetical catches.  An UTMA or UGMA-529 custodial account conversion does not technically allow a parent to avoid giving the assets to their child when they reach age 18 or 21 (depending on the state), most notably. The specific account is labeled as a “Custodial Section 529 account” and the plan sponsor will turn the assets over to the minor when they reach adulthood, just as if it was a classic custodial account in these instances.

Moving to a 529 plan

There are some plans sponsors however, that do not require this special account treatment even though the legal obligation remains for the parent or grandparent. It is completely up to the parent to be honest as to the source of the money when they fill out the Section 529 new account form in addition to this. However, since it is both illegal and allows your child to sue you for mismanagement of their money, lying about the source of the money is not advisable. You are not supposed to use a UTMA or UGMA-529 custodial account conversion to change the beneficiaries of a custodial account.   That would equate to giving your child’s money to someone else in essence. Again, some plan sponsors do not require you to disclose this fact on the front end, and all plans that do take you at your word as to the source of the funds.   Most plans will not allow a change of beneficiary until the current child becomes the outright owner in case you make a UGMA or UTMA-529 conversion and report it honestly. An UGMA or UTMA-529 conversion has no such penalty unlike IRA’s that penalize you if you withdraw your money and invest it in a non-IRA account. However, in case they have a previously unrealized gain, your investments may be subject to capital gain taxes. This may be offset though, by the benefit of having all future growth on the money be sheltered under the new Section 529 plan. A UGMA or UTMA-529 conversion is generally considered a smart move when it comes to qualifying for financial aid. Considering calling your state’s Section Plan 529 sponsor or talking to your investment and tax advisors for more details on making a UGMA or UTMA-529 custodial account conversion.