What Is the Uniform Transfers to Minors Act (UTMA)?
The term Uniform Transfers to Minors Act (UTMA) refers to a law that allows a minor to receive gifts without the aid of a guardian or trustee. Gifts can include money, patents, royalties, real estate, and fine art.
A UTMA account allows the gift giver or an appointed custodian to manage the minor's account until the latter is of age. It also shields the minor from tax consequences on the gifts, up to a specified value.
- The Uniform Transfers to Minors Act (UTMA) allows a minor to receive gifts without the aid of a guardian or trustee.
- The law is an extension of the Uniform Gift to Minors Act.
- The minor named in the UTMA can avoid tax consequences until they attain legal age for the state in which the account is set up.
- The donor can name a custodian, who has the fiduciary duty to manage and invest the property on behalf of the minor until they become of legal age.
- It is up to individual states to adopt or amend the UTMA for its residents.
Understanding the Uniform Transfers to Minors Act (UTMA)
The UTMA is similar to the original version of the Uniform Gift to Minors Act (UGMA). It allows minors to receive gifts and avoid tax consequences until they become of legal age in the state in which they live—typically 18 or 21 years of age. 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.
The UTMA provides a convenient way for children to save and invest without carrying the tax burden. The Internal Revenue Service (IRS) allows for an exclusion from the gift tax of up to $16,000 per person for 2022 ($17,000 for 2023) for a qualifying gift, including gifts to minors.
The minor’s Social Security number (SSN) is used for tax reporting purposes on UTMA accounts. 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 scholarships.
Each state has the option to adopt or amend the UTMA for its residents. For example, Florida passed a statute in 2015 that allows any property to be held by the UTMA custodian until the minor is 25 if desired.
Any earnings that are generated within a UTMA are taxed at the kiddie tax rate by the IRS up to the allotted threshold of $2,200. Earnings after that are taxed at the adult donor's marginal tax rate.
The UTMA allows the donor to name a custodian, who has the fiduciary duty to manage and invest the property on behalf of the minor until that 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.
The assets in a UTMA are counted as part of the donor's taxable estate until the minor takes possession.
Uniform Transfers to Minors Act (UTMA) vs. Uniform Gift to Minors Act (UGMA)
As noted above, the UTMA is just like an earlier version of the UGMA. In fact, it is an extension of the UGMA. The latter was developed in 1956 and revised in 1966. It was limited to the transfer of securities and was finalized in 1986 by the National Conference of Commissioners on Uniform State Laws and adopted by most of the 50 states.
The UGMA provides a way to transfer property to a minor without the need for a formal trust. It allows assets or other property to be managed by a custodian who is appointed by the donor. The property is then turned over to the minor when they become of legal age in the state where the gift was made. As noted above, there are many types of property that can be transferred to minors, including:
- Stocks and bonds
- Real estate
- Fine art
- Mutual funds and other investments
- Intellectual property
Contributions to a UGMA are made using after-tax dollars, which means donors don't receive a tax deduction for making them. Just like a UTMA, gifts made to a UGMA are tax-free up to $16,000 per person for 2022 and $17,000 per person for 2023.
Can a Minor Receive Gifts or Assets Without a Guardian or Trustee?
Yes, a minor can receive gifts or assets without a guardian or trustee as it is stipulated in the Uniform Transfers to Minors Act. The UTMA is a law that governs the transfer of assets from adults to minors. it 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 who donates 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.
The UTMA also 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 a UTMA account is that the money contributed to the account is exempted from paying a gift tax of up to a maximum of $16,000 per year for 2022 ($17,000 for 2023). 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 need-based college scholarship programs and other such initiatives.
When Can a Child Claim Ownership of an UTMA Account?
Depending on the state a UTMA account is handed over to a child when they reach either age 18 or age 21. In some jurisdictions, at age 18 a UTMA account can only be handed over with the custodian's permission, and at 21 is transferred automatically. Enquire with the bank or brokerage where the UTMA is housed for clarification.