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.

  1. Account In Trust

    An account in trust is a type of financial account opened by ...
  2. Uniform Transfer Tax

    A combination of federal estate taxes and federal gift taxes. ...
  3. Child Tax Credit

    The child tax credit is a credit given to taxpayers for each ...
  4. Custodian

    A financial institution that holds customers' securities for ...
  5. Beneficial Interest

    A beneficiary interest refers to an individual's right to benefit ...
  6. Child Support

    The monetary payments that are made from one ex-spouse to another ...
Related Articles
  1. Taxes

    Ways to Give Gifts That Keep Giving Financially

    Consider these gifts during the holiday season that keep on giving financially.
  2. Personal Finance

    Saving for College? Be Educated About Your Options

    When it comes to saving for college, there are better places for your money than a savings account.
  3. Taxes

    How to File Your Child's First Income Tax Return

    Use this quick parental guide to help your child learn the tax-filing process and establish good habits.
  4. Personal Finance

    Saving for College: 7 Options to Consider

    There are many options choose from when you're looking for the right educational savings plan for your child.
  5. Financial Advisor

    New Parents Need a Financial Planning Checklist

    There are many areas of personal finance to consider throughout the journey of parenthood. Here are a few to review with your advisor.
  6. Personal Finance

    Changes to 529 Plans Offer Advantages

    With changes to tax law and 529 plan rules, these educational savings tools are even more valuable. Here are some old and new benefits of 529 plans.
  7. Retirement

    Help Your Kids Start a Retirement Savings Plan

    It's never too early to save for the future - learn how your children can get started.
  8. Personal Finance

    5 Answers to Your Questions About 529 Plans

    Understanding how 529 plans work can go a long way toward helping you save for your child’s college education.
  9. Taxes

    How to Avoid Gift Taxes

    For most, the answer to the question, “How much is the gift tax?” can be “nothing."
  1. Can minors invest in mutual funds?

    Learn how UGMA or UTMA accounts including mutual funds can be set up for minors through a guardian who oversees the account ... Read Answer >>
  2. Can someone who is not yet of legal age open a brokerage account?

    An underage person may have a brokerage account with his or her own name attached to it, but a parent or guardian must be ... Read Answer >>
Trading Center