Uniform Gifts to Minors Act (UGMA)Defined with Examples
What Is the Uniform Gifts to Minors Act (UGMA)?
The Uniform Gifts to Minors Act (UGMA) is an act adopted in every state permitting adults to create custodial accounts that are held for the benefit of a minor.
These accounts are a way for individuals to transfer assets to minors without the amount being subject to gift tax for up to $15,000 for single adults and up to $30,000 for married couples.
This has traditionally been used for parents to transfer money to their child without the costly and difficult process of having a lawyer establish a trust.
How the Uniform Gifts to Minors Act (UGMA) Works
UGMA accounts are a form of custody accounts that allow assets, including funds and securities, to be transferred to a minor while being managed by an adult.
The donor will appoint an individual to manage the account, and this does not need to be a professional custodian.
The donor has the option of being the custodian or choosing another individual, or a financial institution to act as the custodian, or trustee, of the account.
The custodian will then hold the account in their name until the beneficiary reaches maturity and has the responsibility to manage the UGMA account in the beneficiary’s best interest until that date.
The custodian may use the assets in the fund to purchase investments such as stocks and other securities in the best interest of the beneficiary.
However, a UGMA account will generally be limited solely to these types of publicly traded instruments.
UGMA accounts are typically easy to open through financial institutions such as banks or brokerages, and family and friends of the child can freely make deposits in the account with no limits on contributions.
However, the donor will revoke all possession and control of the assets, and they will permanently become the property of the account.
These plans provide considerable flexibility in how deposited funds may be used.
Early withdrawals are not subject to penalties, and the custodian of the account may use the deposited funds freely in ways that benefit its beneficiary.
This means that such funds could be used, for example, to purchase clothing or pay for educational programs for the child.
Once the child does come of age, they will gain full control of the assets, and there are no restrictions on how they may be used.
The most common reason for establishing a UGMA account is for families to set aside money for a child’s education.
This can allow parents to set aside an amount for the child and achieve some tax benefits.
However, financial aid will typically regard the UGMA account as the child’s asset, which can reduce financial aid benefits.
UGMA contributions are made after-tax, which means that those making the contributions will not receive a deduction on income tax for these contributions.
However, these contributions will not be subject to the same gift tax restrictions.
For the years 2020 to 2021, for example, a maximum of $15,000 for an individual or $30,000 for a married couple may be contributed without being subject to the gift tax.
For federal tax purposes, the beneficiary is the owner of any assets that are included in the UGMA account and any income the account generates.
However, the earnings from the account can go on either the parents’ or the beneficiary’s taxes.
The beneficiary’s age, as well as the amount of income the account produces, will determine the reporting requirements.
In certain situations, it may be possible to include a child’s UGMA account on the parents’ taxes, which would allow the parents to make use of the “Tax on a Child’s Investment and Other Unearned Income.”
This is allowed if the child made under $2,200 in unearned income and they were 19 years old or younger or less than 24 years old, if a full-time student, as of the end of the tax year in question.
If the parents qualify for this tax rate, $1,100 of the child’s income is tax-free.
After this, the next $1,100 in income is taxed using the child’s tax rate.
Then, any additional income is taxed at the parent’s income tax rate.
Should the parents not choose this option, or if the child has more than $2,200 in unearned income at the end of the tax year, the child would need to file their own return.
A UGMA does count toward the parents’ lifetime gift-giving limit.
Also, if the custodian of the account dies before transferring the property to the beneficiary, the property will be part of the donor’s estate.
UGMA vs. UTMA
In most situations the UTMA and the Uniform Gifts to Minors Act are used interchangeably.
However, there are a few distinct features to these two acts.
First the UTMA, which is a newer act, passed in most states to replace the UGMA permits the account to hold any variety of assets.
Examples of this could include real estate holdings, patents, or cars.
In contrast, a UGMA account is limited to certain financial assets such as stocks, bonds, and mutual funds.
Another significant difference is that every state permits UGMA accounts; however, there are a few that do not permit UTMA accounts.
- A UGMA account allows adults to transfer financial assets to minors without the burden of establishing a special trust fund.
- A UGMA account allows an adult to manage and control the account until the beneficiary reaches adulthood, at which time they will gain control of the account.
- Earnings generated by a UGMA account will not be tax-free. Instead, they will be taxed at “kiddie tax” rates up to a specific amount.
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Cornell Law School "Uniform Gifts to Minors Act (UGMA)" Page 1 . November 22, 2021
University of Arkansas at Little Rock "The Uniform Transfers to Minors Act—New and Improved, But Shortcomings Still Exist Shortcomings Still Exist" Page 1 . November 22, 2021
Cornell Law School "UTMA" Page 1 . November 22, 2021