The Uniform Gifts to Minors Act (UGMA) was established in 1956 as a tool to simplify the process of transferring assets to minors without the need for lengthy and often arduous legal mechanisms such as trusts and court proceedings. Without UGMA, parents or guardians would have to set up trusts to hold assets for the benefit of minors, which could require significant amounts of paperwork and fees for both setting up and managing.
Benefits of UGMA
The UGMA provides a straightforward mechanism for transferring assets to a minor, which allows a minor to accept gifts of property, cash, stocks, bonds, and other financial assets. UGMA accounts are easily established at banks, brokerages, or mutual fund companies, and ownership can be transferred without technically breaking any laws.
The accounts are invested and managed on behalf of the minor, guided by the custodian — the parent or guardian — according to their best judgment as to how the proceeds are best used to benefit the minor. The account is usually spendable once the minor reaches the age of majority, which is 18 or 21, depending on the state.
Limitations of UGMA
Under UGMA, the custodian has full control and discretion over the account and the assets gifted to the minor. The custodian is legally obligated to use the account in a way solely intended for the minor’s benefit. However, once the minor reaches the age of majority and takes control of the UGMA account, the custodian no longer has the right to dictate how the funds are used, meaning the minor can use the funds however they wish, regardless of the custodian’s intentions when setting up the account.
In addition, part of the income earned by UGMA accounts is subject to the “kiddie tax,” meaning the account income will be taxed at the parent’s income tax rate if the income exceeds $2,200 annually. This could potentially limit the amount of money available for the minor.
Benefiting From UGMA
UGMA makes it easier for parents or guardians to give a gift of lifetime significance to their children or wards — whether it’s to kickstart a college education, buy into a business, or just to provide an extra layer of financial security and peace of mind. UGMA accounts can come with income tax savings, prevent wasting assets due to excess spending, and add an extra layer of privacy and protection for the minor.
At the same time, it’s important to realize the limitations of UGMA and think about the impact of the consequences of having the minor control the money once they reach the age of majority. However, if used wisely, UGMA offers a simple and straightforward way to provide financial security to minors.