Uniform Gifts to Minors Act

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.

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Uniform Gifts to Minors Act (UGMA)

Uniform state laws that facilitate irrevocable gifts to a minor by eliminating the requirement of a guardian or trust. A custodian, who may be the donor, is appointed to manage the gift, but full rights to the principal and income reside with the minor. Under 1986 tax reform, only the first $1,000 of income from these custodial accounts will be taxed at the child's rate if the child is under 14 years of age. Income above $1,000 is taxed at the donor's rate. When the child turns 14, all income from the trust is taxed at the child's rate.

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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.