What is the Uniform Gifts to Minors Act - UGMA
The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) allow minors to own assets including securities. Individuals can establish UGMA accounts on behalf of minors or beneficiaries, eliminating the need for an attorney to establish a special trust fund.
BREAKING DOWN Uniform Gifts to Minors Act - UGMA
An UGMA account functions as a type of custodial account designed to hold and protect assets for the beneficiary. The donor can appoint him/herself, another person or a financial institution to the role of custodian.
UGMA accounts can be opened through a bank or brokerage institution and they are typically used to fund a child’s education. Friends and family can make contributions toward these investment vehicles, which have no contribution limits. The custodian—who has a fiduciary duty to manage the account in the beneficiary's best interest—can use the funds to buy stocks, bonds, mutual funds and other securities on behalf of the minor.
The donor can make certain withdrawals for expenses that benefit the minor including tuition payments, tutoring lessons and computer equipment. But because UGMA assets are considered property of the benificiary, it will count against federal financial aid.
Access to UGMA account assets must be given to the minor when he or she reaches the age of majority as defined by state law. At that point, the beneficiary can use these funds as he or she pleases.
UGMA Tax Implications
For federal tax purposes, the minor or beneficiary is considered the owner of all assets in an UGMA account and the income they generate. But these accounts can be taxed either to the child or the parent. Reporting requirements depend on the amount of income the account draws and the beneficiary’s age.
Under certain circumstances, parents can elect to report their children’s UGMA accounts on their own tax returns, thereby taking advantage of the “kiddie tax” or Tax on a Child's Investment and Other Unearned Income.
This means that if the child’s unearned income including UGMA income was less than $1,900 and he or she was 19 or a full-time student younger than age 24 at the end of the corresponding tax year, parents can elect to report their child’s income on their own tax return. In this case, the first $950 of a the child’s unearned income is tax-free. The next $950 is taxed at the child’s tax rate. Anything exceeding $1,900 is taxed at the parents’ tax rate.
If such an election is not made or if the child’s unearned income exceeded $1,900 at the end of the tax year, the minor would have to file a tax return subject to “kiddie tax” rules.
For tax purposes, an UGMA affects a donor’s lifetime gifting limits. Should a donor acting as the custodian die before the custodial property is transferred to the minor, the entire custodial property is included in the donor's taxable estate.
UGMA and UTMA [Uniform Transfers to Minors Act] are usually used interchangeably, but state law can dictate what types of assets can go into either account.