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Uniform Gifts to Minors Act (UGMA)

Legislation that provides a tax-effective manner of transferring property to minors without the complications of trusts or guardianship restrictions.

Uniform Gifts to Minors Act

Legislation in several U.S. states allowing cash or securities to be transferred from a donor to a minor child without needing to set up a trust. Specifically, this act was intended to allow transfers to persons under 18 or 21 (depending on the jurisdiction). The act allows for the giving of gifts to children up to a certain amount in value without any tax consequences. These gifts are held in a custodianship until the child reaches the age of majority. The custodian is appointed by the donor (and is often the donor himself/herself). The UGMA was set up to allow these transfers to occur without a lawyer needing to set up a trust, a process that can be quite complicated and sometimes expensive. See also: Uniform Transfers to Minors Act.


Uniform Gifts to Minors Act (UGMA).

Under the UGMA, you as an adult can set up a custodial account for a minor and put assets such as cash, securities, and mutual funds into it.

You pay no fees or charges to set up the account, and there is no limit on the amount you can put into it. To avoid owing potential gift tax, however, you may want to limit what you add each year to an amount that qualifies for the annual gift tax exclusion.

One advantage of an UGMA custodial account is that you can transfer to it assets that you expect to increase in value. That way, any capital gains occur in the account, and you avoid potential estate taxes that might have been due had you owned the asset at your death.

If you sell an asset in the account, taxable capital gains are calculated at the beneficiary's capital gains tax rate provided he or she is 18 or older. Taxable capital gains are calculated at the parents' rate if the child is younger than 18.

One potential disadvantage of a custodial account is that any gift to the account is irrevocable.

The assets become the property of the beneficiary from the moment they go into the account, even though as a minor he or she cannot legally control activity in the account or take money out. At majority, which typically occurs at 18 or 21 depending on the state, the beneficiary may use the assets as he or she wishes.

In addition, if you are both the donor and the custodian, and die while the beneficiary is still a minor, the assets are considered part of your estate. That could make your estate's value large enough to be vulnerable to estate taxes.

References in periodicals archive ?
Transfer under the UGMA is a complete gift at the time of transfer to the extent of the full fair market value of the transferred property.
Commonly, the custodian (who may be a parent) simply establishes a UGMA account at a financial institution and transfers funds to it.
ESTATE PLANNING, supra note 21, at A-94 (explaining that UTMA and UGMA accounts are custodial accounts that can be used for the support, maintenance, education, and benefit of the minor; explains that the minor takes legal ownership of the property once the minor reaches the age of legal capacity).
S withdraws $1,500 from a UGMA account, set up by his parents on his tenth birthday, to help pay tuition.
Both UGMA and UTMA accounts are controlled by state law.
132) Legal assistance attorneys should advise servicemembers that designating a minor beneficiary using a custodian under the UGMA and UTMA is preferable to designating an individual by name under a verbal agreement that the designated beneficiary will distribute the proceeds to a minor upon the servicemember's death.
12] The UGMA is a constructive trust set up under state statutes, where the trust's provisions satisfy the three elements listed at the beginning of this section.
Almost any type of property may be placed under a custodian's care; however, in states where only UGMA has been adopted, some restrictions on permissible investments may apply.
For the jurisdictions that have either the Uniform Girls to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), this section explains whether the law allows for testamentary transfers under the UGMA or UTMA and at what age property under the UGMA or UTMA must be turned over to the minor.
Certain assets held, such as custodian accounts or as tenants in common, UGMA or UTMA accounts, may need to be shifted, retitled, or re-configured to preserve government benefit eligibility.
A $15,000 UGMA account in the student's name adds $5,250 to the family contribution annually but only $1,800 if the amounts are in the parent's account.