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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Uniform Gifts to Minors Act (UGMA)

What it is:

The Uniform Gifts to Minors Act (UGMA) is a set of rules under which adults can give money to a minor via a custodial account in the minor's name. In some states, the UGMA has been superseded by the Uniform Transfers to Minors Act (UTMA).

How it works (Example):

For example, assume that a grandmother wants to give $10,000 to her granddaughter. Under the UGMA, she can establish an account in the child's name (without having to establish a trust) into which she can deposit the $10,000. The account must have a custodian (the donor can be the custodian) who has the responsibility to manage the assets on behalf of the minor. The account's assets are the legal property of the minor, and she receives automatic access to these funds when she reaches a certain age (typically 18 to 25 years old, depending on the state).

Because the custodians retain control of the assets being transferred, the UGMA is an ideal approach to use when the senior generation is not ready to transfer control to the younger generation.

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An important characteristic of this strategy is that the transfers are tax-free. However, there are limits on the size of annual gifts -- the limits change every year and generally increase by an inflation-adjusted amount. There are also limits on gift amounts when more than one child is involved or if the account is set up so that income generated by the investments goes to one person and the principal goes to another.

Why it Matters:

The UGMA creates an effective way to transfer substantial amounts of an estate to a minor tax-free. This in turn reduces the estate tax due on the donor's estate after his or her death.

If you're a successful investor, you're holding assets that have appreciated substantially since the day they were initially purchased. When it's time to sell or transfer the assets, though, the tax bill can be quite painful. A UGMA allows you to transfer a highly appreciated asset without paying capital gains, gift or estate taxes.

Under a UGMA, virtually any category of asset can be transferred: stocks, bonds, real estate, collectibles, etc. A UGMA allows you to transfer the ownership of your assets to your heirs without relinquishing control of the assets.

There are many reasons unrelated to taxes for considering a UGMA, making it an appropriate tool for many investors to consider. The consolidation of family assets can help simplify continuing management and the ultimate transfer to future generations. Rather than gifting specific assets on an annual basis, assets in a UGMA are transferred, which results in a simplified and consistent approach to gifting.

There are some risks. It is important to note that because of the UGMA, minors can own securities in their own names, but the account custodians are responsible for managing the funds prudently (i.e., not taking undue risk with the investments), and they can be sued for breach of fiduciary responsibility if the account is mismanaged.

It is also important to note that money in UGMA accounts almost always reduces a minor's eligibility for financial ai In any case, gifting money to minors can be complicated, and it's a good idea to consult with a qualified tax professional before proceeding.