http://news.morningstar.com/articlenet/article.aspx?id=537628

Question: I set up an UGMA for my daughter as a way to help save for college, but now I read that the money in the account could hurt her chances of getting financial aid. Can I cash out the account or move the money to a different type of college-savings plan?

If you can access it, we recommend reading the answer on Morningstar’s site, linked to above.

This is one of the first questions that Meyers Wealth Management addressed when we first started posting News and Notes.  Over time, we’ve noticed that the News and Notes article about UGMA/UTMA accounts has actually been one of the most popular pages on our website – which surprised us.  Nevertheless, these accounts are still around.  As we noted in our article, they were very popular about a generation or so ago – parents of kids born in the 60s and 70s often set them up – and so now many of those kids of the 60s and 70s, either remembering what their parents did, or at the urging of those (now) grandparents, have gone and set up these same UGMA/UTMA accounts, often without realizing that the benefits which they offered so long ago are no longer as valuable as they were, and that there are often far better alternatives available today which were not available then.

Here’s a link to the article we posted back in October 2009:  http://meyersmoney.com/news_and_notes/ugma_utma_and_529_plans.html

The short story is this: (a) a UTMA/UGMA account is an asset of the child – it belongs to the child and the parent is only acting as a trustee for the benefit of that child — and when the child reaches a certain age, the child (now an adult) may spend it any way he or she likes; (b) UTMA/UGMA accounts may not offer much in the way of tax advantages due to changes in the “kiddie tax” rules; (c) if you are applying for college financial aid, the contents of the UTMA/UGMA account are counted differently from assets owned by the parents – less favorably, in fact, since they are considered, again, asset of the child and not of the parents.

That all said, if you already have assets in such an account, you have only a few, limited options.  You cannot simply take the money back – it’s not yours anymore – it belongs to the child – and there are rules regarding what the money may be spent on.

And there are alternatives – from 529 plans to simply keeping the money in your own accounts (especially if you haven’t maxed out your retirement accounts).

Lastly, if someone recommends buying cash-value life insurance instead, while there may be circumstances where that makes sense, be very careful – usually such policies are great deals for the person selling them, so there is a dangerous conflict of interest here, and they are certainly not the best choices for everyone.

If you are saving for college and are considering (or already have) a UTMA/UGMA account, make sure to read these articles and understand the implications.  And if you have any questions, please consider consulting a professional financial planner.