Key Takeaways
- Custodial account transferring assets to minors.
- Custodian controls funds until minor reaches majority.
- Limited to cash and securities, no real estate.
- Funds become unrestricted once minor reaches legal age.
What is Uniform Gifts to Minors Ac (UGMA)?
A Uniform Gifts to Minors Act (UGMA) account is a custodial account that allows adults to transfer financial assets to a minor without establishing a formal trust. The custodian manages the account for the child's benefit until they reach the age of majority, typically 18 or 21 depending on state law. UGMA accounts are a straightforward way to gift stocks, bonds, or cash under the Uniform Gifts to Minors Act.
Assets contributed to a UGMA account become the minor's property, with restrictions on usage until maturity. Earnings from these accounts are subject to tax rules related to unearned income, which can impact tax liabilities.
Key Characteristics
UGMA accounts have distinct features that make them useful for gifting and saving for minors.
- Custodial Ownership: The account is managed by a custodian who controls the assets for the minor's benefit until the age of majority.
- Irrevocable Gifts: Contributions are irrevocable gifts, meaning once transferred, assets cannot be reclaimed by the donor.
- Permissible Assets: Typically limited to cash, stocks, bonds, and mutual funds; unlike UTMA, real estate and tangible property are excluded.
- Taxation: Earnings follow unearned income tax rules, with reporting under the minor's Social Security number and filing requirements similar to a W-2 form for earned income.
- Transfer of Control: Full control passes to the minor at the state-defined age of majority, with no restrictions on usage thereafter.
How It Works
You open a UGMA account through a bank or brokerage, where a custodian—often a parent or guardian—manages the investments. Contributors can gift after-tax cash or securities, including stocks and bonds such as those from funds like SCHB or bonds like BND.
The custodian must use the funds solely for the minor’s benefit, such as educational expenses or healthcare, and cannot withdraw money for personal use. Once the minor reaches the age of majority, control automatically transfers to them, often without any further restrictions or requirements.
Examples and Use Cases
UGMA accounts are popular for long-term savings and gifting strategies, especially when you want to invest in securities on behalf of a minor.
- Airlines: A family may gift shares of Delta stock to a child's UGMA account, allowing the custodian to reinvest dividends for growth until the child comes of age.
- Investment Funds: Using low-cost index funds recommended in guides like best low-cost index funds can help grow the minor’s portfolio efficiently within a UGMA account.
- Beginner Investors: A custodian might start with ETFs highlighted in best ETFs for beginners to diversify a minor’s holdings responsibly.
Important Considerations
UGMA accounts are irrevocable gifts, so once you contribute, you cannot take back the assets. The minor gains full control at the age of majority, which could lead to unplanned spending if the child is not financially prepared.
Tax implications are important to understand as earnings are taxed under unearned income rules, and UGMA accounts can affect eligibility for financial aid. Consulting a financial advisor or reviewing state-specific laws will help ensure the account suits your gifting and investment goals.
Final Words
UGMA accounts offer a straightforward way to gift assets to minors with custodial oversight until adulthood. Review your state’s age of majority rules and tax implications before opening an account to ensure it aligns with your financial goals.
Frequently Asked Questions
A UGMA account is a custodial account that lets adults transfer financial assets like cash, stocks, or bonds to a minor without setting up a formal trust. A custodian manages these assets until the child reaches the age of majority, usually 18 or 21 depending on state law.
A custodian, typically a parent or guardian, opens the UGMA account in the minor’s name using their Social Security number. Anyone, including parents, grandparents, or other relatives, can contribute after-tax dollars to the account.
UGMA accounts can hold financial instruments such as cash, stocks, bonds, and mutual funds. Unlike UTMA accounts, UGMA does not allow real estate or other tangible property.
The minor gains full control of the UGMA account when they reach the age of majority, which is usually 18 but can be up to 21 depending on state laws. At that point, the funds can be used for any purpose without restrictions.
Earnings are subject to the 'kiddie tax' rules: the first $1,300 of unearned income is tax-free, the next $1,300 is taxed at the child's rate, and amounts over $2,600 are taxed at higher trust or estate rates. Income is reported under the minor’s Social Security number, which may reduce parental tax liability.
UGMA accounts are limited to cash and securities, while UTMA accounts can include a broader range of assets like real estate and art. Also, the age of majority for UGMA is typically 18, whereas UTMA often allows control up to 21 or 25 years old.
No, the custodian must manage the UGMA account funds solely for the minor’s benefit and cannot use the money for personal expenses. The custodian also cannot change the beneficiary or withdraw funds for non-beneficial reasons.
No, contributions to a UGMA account are made with after-tax dollars and do not qualify for any tax deductions.
