Because a UTMA account is not a trust, the income earned by the account is always taxable to the beneficiary, even if used for expenses considered to be a support obligation of the donor. Neither the donor nor the beneficiary realizes any taxable income while the contributions are invested. The beneficiary realizes taxable income only when distributions are made or tuition is paid from the program, and the taxable income is proportionate to the increases in the fund over the contributions. The undistributed tuition fund is not part of the beneficiary's taxable estate, but can be refunded to the original donor. Beneficiaries can be changed only to a new beneficiary within the same family.
Refunds can result in penalties.
Beneficiaries can be changed only to a new beneficiary within the same family. Contributions qualify for the federal gift tax annual exclusion and are no longer part of the donor's taxable estate. Neither the donor nor the beneficiary realizes any taxable income while the account is invested. The undistributed tuition fund is not part of the beneficiary's taxable estate. Direct Tuition Payments It should also be remembered that the direct payment of tuition to a tax-exempt school is not considered to be a taxable gift, regardless of who makes the payment.