The Uniform Gifts to Minors Act (UGMA) is an act in some states of the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...

that allows assets such as

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

, where the donor has given up all possession and control, to be held in the custodian's name for the benefit of the minor without an attorney needing to set up a special

trust fund A trust is a legal relationship in which the holder of a right gives it to another person or entity who must keep and use it solely for another's benefit. In the Anglo-American common law, the party who entrusts the right is known as the "settl ...

. This allows a minor in the United States to have property set aside for the minor's benefit and may achieve some income tax benefit for the child's parents. Once the child reaches the age of maturity (18 or 21 depending on the state), the assets become the property of the child and the child can use them for any purpose. Contributing money to an UGMA account on another person's behalf could be subject to

gift tax In economics, a gift tax is the tax on money or property that one living person or corporate entity gives to another. A gift tax is a type of transfer tax that is imposed when someone gives something of value to someone else. The transfer must ...

; however, the

Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 ...

of the United States allows persons to give up to the annual gift tax exclusion to another person without any gift tax consequences, and gifts exceeding that amount as long as total gifts are below the lifetime limits. In the majority of states that have adopted the

Uniform Transfers to Minors Act The Uniform Transfers To Minors Act (UTMA) is a uniform act drafted and recommended by the National Conference of Commissioners on Uniform State Laws in 1986, and subsequently enacted by most U.S. States, which provides a mechanism under which gift ...

(UTMA), the assets are treated similarly. The assets are held in the custodian's name until the child reaches age of maturity. States that adopted UTMA also repealed UGMA; UTMA specifically provides that contracts in UTMA states which reference UGMA are governed by UTMA. Thus, UGMA is often still referred to in contracts designed for use in multiple states, even though it may actually mean UTMA in a particular state. Under the UGMA or UTMA, the ownership of the funds works like it does with any other trust and the donor must appoint a custodian (the trustee) to look after the account for the benefit of the beneficiary. Until 1986, a UGMA or UTMA account allowed the assets to be taxed at the minor's

income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...

bracket. Tax law changes in 1986, 2006, 2007 and 2017 known as the "kiddie tax" have substantially reduced the tax savings of UGMAs and UTMAs. Until 2018, for beneficiaries under 19 (under 24 if a student), the first of

unearned income Unearned income is a term coined by Henry George to refer to income gained through ownership of land and other monopoly. Today the term often refers to income received by virtue of owning property (known as property income), inheritance, pensions ...

was tax-free, the second was taxed at the minor's rate (typically 15%), and the amount over was taxed at the parent's rate. The current rule is that for beneficiaries under 19 (under 24 if a student), the first of

is tax-free, the second is taxed at the minor's rate (typically 12%), and the amount over is taxed at the ordinary and capital gains rates applicable to trusts and estates. UGMA and UTMA accounts can invest in the stock market. One negative effect of UGMA or UTMA assets for minors who plan to attend college is that financial aid is typically reduced by 20-25% of the UGMA or UTMA balance. Some financial advisers therefore advise depleting the balance in these accounts, always for purposes benefiting the minor such as

summer camp A summer camp or sleepaway camp is a supervised program for children conducted during the summer months in some countries. Children and adolescents who attend summer camp are known as ''campers''. Summer school is usually a part of the academ ...

, books, computer and similar expenses, well before the minor begins the process of applying to college.

References

{{DEFAULTSORT:Uniform Gifts To Minors Act Taxation in the United States Gifts to Minors United States securities law Tax avoidance