The Uniform Gifts to Minors Act (UGMA) is a set of federal laws that allow a person to transfer assets to people under the age of 18 or 21, depending on the age of the majority in the state in which the account exists. The UGMA allows these transfers to be made up to a certain specified amount without the donor having to pay the federal gift tax on the transfer, which is mostly done by parents transferring assets to their children.
There is a cap on the amount that a donor can transfer to a UGMA account. For example, in the year 2022, the limit was $16,000 per person. Any transferred amounts above the cap would be subject to the gift tax. The cap is generally raised on an annual basis.
The assets transferred are placed in UGMA accounts, where they are held on behalf of the minor who has received the transfer. The donor can set up the account at a bank or a brokerage institution. The transfer is irrevocable. In other words, it cannot be undone.
Another benefit offered by making transfers pursuant to the UGMA is that it saves a person from having to pay an attorney to set up a special trust to transfer and hold assets for a minor child.
Funds transferred pursuant to the UGMA are subject to special tax treatment. The earnings on a UGMA account are taxed at a special lower kiddie tax rate up to a certain amount, although the earnings can be taxed either to the minor or to the parent.
An adult custodian manages an account set up pursuant to the UGMA until the minor beneficiary comes of age and takes full control of it. The donor cannot deduct the amount transferred from their income for tax purposes.
Accounts under the UGMA are easy to establish. They offer a simple and straightforward way for a minor to inherit assets from their parents, although it is an alternative to inheriting through a will. They can be used for any purpose, so they provide a great deal of flexibility.
The donor can appoint themselves, another person, or a financial institution as the account’s custodian. If the donor is the custodian and passes away before the property is fully transferred to the minor, all of the assets in the account are included in the donor’s taxable estate for estate tax purposes.
The custodian is authorized to invest the funds in the account into stocks, bonds, mutual funds, and other securities on behalf of the minor. However, the custodian has a fiduciary duty to invest the funds in the account for the benefit of the minor.
Can the Donor Withdraw Funds From a UGMA Account for Any Reason?
The donor can withdraw funds from a UGMA account only to pay any expenses that benefit the beneficiary, e.g., to pay school tuition. It is important to remember that the transfer of the assets to the account cannot be reversed.
There are no penalties for withdrawals made before the minor reaches the age of majority. However, they must report the account as an asset because UGMA assets are technically the minor’s property if they apply for federal financial age to attend college. It might make it less likely that they would qualify for federal financial aid.
Once the minor reaches the age of majority in their state and is an adult, they have full access to the assets in their UGMA account and may use the funds in any way they wish.
What Is the Uniform Transfers to Minors Act?
The Uniform Transfers to Minors Act (UTMA) is another federal law allowing donors to set up custodial accounts. The main difference between the UGMA and the UTMA is that custodial accounts set up under the UTMA can contain any tangible or intangible asset.
The assets in a UTMA account can include real estate, works of art, patents, royalties, and other intellectual property. The UGMA, on the other hand, limits its accounts to assets considered financial assets, such as cash, stocks, bonds, insurance policies, and annuities.
Individual states are allowed to either adopt the UTMA as Congress wrote it. Or they are allowed to amend the UTMA for its residents. In 2015, Florida, for example, adapted the law to keep the minor who owns the account from accessing the assets until they turn 25, if the donor so chooses. Otherwise, the rules regarding the two types of accounts are, for the most part, the same.
Finally, as of 2020, one state has yet to recognize the UTMA, and that is South Carolina. However, a person always wants to double-check the law in their particular state to confirm the status of UGMA and UTMA accounts.
Can Multiple People Contribute to One UGMA or UTMA Account?
Friends and family members, other than the minor’s parents, are allowed to make contributions to a UGMA account for a minor. There are no limits on the dollar value of contributions. There are no limits on the amount of income that the investment of the assets in the account can earn.
Does the Money Automatically Go to a Minor When They Reach the Age of Majority?
It is important to note that neither the UGMT nor the UTMT allow a minor to be granted the money in an account until they have reached the age of majority in a particular state in which the account is located. This is usually either 18 or 21 years of age, although as noted above, the UTMT allows a state to modify this provision of the Act, as Florida has done.
Once the minor reaches the age of majority, they can claim the assets in the account. The custodian cannot prevent this. The adult owner of the account is free to do with it what they want. If this is not the original donor’s desired result, they would have to choose a different vehicle for their transfer, e.g., a traditional trust.
As mentioned, the custodian must prudently manage the funds. The custodian has a fiduciary duty to the beneficiary, i.e., the minor.
Is There a Way for the Donor to Delay or Restrict a Minor’s Access to the Fund?
As discussed above, once a minor becomes an adult, neither the donor nor the custodian can prevent them from having complete control over the funds. There is only one way in which a person may be able to delay or restrict them from doing so.
If the legal age for an adult is 18 in a state, then the donor may be able to delay the minor from gaining access to the account until they turn 21 years old. However, this delay can only be achieved if the donor has expressly stipulated that condition when the account is first set up.
With this one exception, it is not possible to prevent a minor from receiving the funds once they have reached the age of majority in the state where the account is located. The UTMT has the further exception noted above, i.e., a state may authorize a change in the age at which the minor can assume full control of the account’s assets.
Again, if a donor wishes to restrict the minor’s ability to access the account, the donor would not use a UGMA or UTMA account. Rather, the donor should establish a trust fund that will allow the donor to specify the age at which the minor could access the funds or restrict the uses that the beneficiary of the trust can make of trust funds.
Do I Need the Help of a Lawyer for My UGMA or UTMA Account Issue?
One of the benefits of using a UGMA/UTMA account is that you do not need an attorney to set up these types of accounts. However, it is essential to understand that as the donor, you have limited control over the account, especially once the minor reaches the age of majority.
Therefore, consider consulting a local trust attorney for further advice. An experienced trust attorney can tell you what type of account may be best for your situation and can discuss options regarding when you would like the minor to gain access to funds, including any restrictions you want to place on the uses of the property in the account. A trust attorney can advise you of the options and the pros and cons of each.
