UGMA

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.

UGMA

See Uniform Gifts 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.