What Is the Uniform Transfers to Minors Act (UTMA)?
The Uniform Transfers to Minors Act (UTMA) allows a minor to receive gifts—such as money, patents, royalties, real estate, and fine art—without the aid of a guardian or trustee. A UTMA account allows the gift giver or an appointed custodian to manage the minor's account until the latter is of age. UTMA also shields the minor from tax consequences on the gifts, up to a specified value.
Understanding the Uniform Transfers To Minors Act
How the Uniform Transfers to Minors Act (UTMA) Works
The UTMA is an extension of the Uniform Gift to Minors Act (UGMA), which was limited to the transfer of securities. Note that, while the UTMA offers a way to build a tax-free savings account for minor children, the assets will be counted as part of the custodian's taxable estate until the minor takes possession. The UTMA was finalized in 1986 by the National Conference of Commissioners on Uniform State Laws and adopted by most of the 50 states. It allows minors to receive gifts and avoid tax consequences until they become of legal age for the state, which is typically age 18 or 21.
While the UTMA offers a way to build a tax-free savings account for minor children, the assets will be counted as part of the custodian's taxable estate until the minor takes possession.
UTMA vs. UGMA
The difference between the UTMA and UGMA is the maturity time. The UTMA allows for maturity before it is handed to the beneficiary, up to 25 years. The UGMA matures at 18 years.
The termination date for each are different as well. While UGMA termination is at 18 years, the termination age for UTMA is 21. Further, UTMA accounts allow parents to donate gifts such as money, stocks, or life insurance. However, UGMA accounts only allow the donation of basic assets.
The UTMA is similar to the original version of the UGMA that was developed in 1956 and revised in 1966. The UGMA provides a way to transfer property to a minor without the need for a formal trust. It allows property to be managed by a custodian who is appointed by the donor. The property is then turned over to the minor when the minor becomes of legal age in the state where the gift was made.
The UTMA incorporates the language of the UGMA and extends the original definition of gifts beyond cash and securities to include real estate, paintings, royalties, and patents. It is up to each state to adopt or amend the UTMA. The state of Florida passed a statute in 2015 that allows the property to be held by the custodian until the minor is 25 if desired.
- The Uniform Transfers to Minors Act (UTMA) allows a minor to receive gifts without the aid of a guardian or trustee.
- The minor can avoid tax consequences until they attain legal age for the state.
- The donor can name a custodian who has the fiduciary duty to manage and invest the property on behalf of the minor until the minor becomes of legal age.
Starting in 2018, the IRS allows for an exclusion from the gift tax of up to $15,000 per person for a qualifying gift, including gifts to minors. The UTMA provides for a convenient way for children to save and invest without carrying the tax burden. The minor’s Social Security number is used for tax reporting purposes on UTMA accounts. It is also important to note that because assets held in a UTMA account are owned by the minor, this may have a negative impact when the minor applies for financial aid or educational scholarships.
Control of Assets
The Act allows the donor to name a custodian, who has the fiduciary duty to manage and invest the property on behalf of the minor until the minor becomes of legal age. The property belongs to the minor from the time the property is gifted. If the donor dies while serving as custodian, the value of the custodianship property is included in the donor’s estate.
Frequently Asked Questions
What is the Uniform Transfers to Minors Act (UTMA)?
As its name suggests, the UTMA is a law concerning the transfer of assets from adults to minors. The UTMA provides parents and other adults with a tax-advantaged way to pass on gifts to minors without needing to create a formal trust. In doing so, the adult donating the gift would typically act as the custodian for those assets until the minor reaches legal age. Alternatively, the donor can also appoint a third party to serve as the custodian of those assets.
What is the difference between the UTMA and the Uniform Gift to Minors Act (UGMA)?
The UTMA and the UGMA serve similar purposes, but there are important differences between them. Most notably, the UTMA allows for a broader range of assets to be gifted, including financial securities such as stocks and bonds. Also, the UTMA provides additional time for the assets being gifted to reach their maturity dates, such as in the case of a bond. By contrast, the UGMA requires the assets to be assumed by the minor once the minor reaches 18 years of age.
What are the pros and cons of using a UTMA account?
The main advantage of using an UTMA account is that the money contributed into the account is exempted from paying a gift tax, up to a maximum of $15,000 per year. Moreover, any income earned on the contributed funds is taxed at the tax rate of the minor who is being gifted the funds. Since the minor’s income is presumably significantly lower than that of the adult donor, this can lead to significant tax savings. One of the drawbacks of using a UTMA account, however, is that it can make the recipient less eligible for needs-based college scholarship programs and other such initiatives.