Uniform Gifts to Minors
Parents and grandparents are continually looking for new ways to help their children and grandchildren finance the cost of a college education. Minors generally cannot own mutual fund shares outright, but their parents and grandparents can set up accounts in the child’s name under two very similar tax laws:
- Uniform Transfer to Minors Act, or UTMA
- Uniform Gifts to Minors Act, or UGMA
Here are some of the questions we commonly are asked about these accounts.
What is an UTMA or UGMA?
An UTMA or UGMA is a custodial arrangement that allows individuals to open an account to benefit a minor child. The account is established under the child’s social security number, with an adult (usually a parent or guardian) as custodian.
How can these accounts be used?
UTMA or UGMA accounts can be used to offset the cost of higher education or simply to help a young person get started on the road to financial security.
Note: Assets held in an UTMA or UGMA may affect a child’s financial aid eligibility for college.
What’s the difference between UTMA and UGMA?
While the accounts are generally very similar, there are two significant differences:
- Age of Majority – In most states, the child can take ownership of an UGMA account at age 18. For UTMAs, the age of majority is usually 21.
- Types of Gifts – Usually, only cash, mutual funds, securities and insurance policies can be held in an UGMA. The UTMA is more flexible and generally allows almost any asset to be gifted to the minor.
Do states handle UTMAs and UGMAs differently?
Yes, they do! And this is very important. UTMA, which was enacted in 1986, has superceded UGMA (created in 1956) in states that have adopted UTMA.
Once a state adopts the UTMA, you can no longer establish an UGMA for a child living in that state.
Due to the differences among states and the various statutes on UTMAs and UGMAs, you should consult your financial advisor to determine which custodial account your state allows and to review the guidelines for the age of majority in your state.
Who can contribute to an UTMA or UGMA?
Anyone – friends, grandparents, family – can contribute to an UTMA or UGMA.
How much can a person contribute to an UTMA or UGMA?
There is no limit to how much you can contribute to an UTMA or UGMA, but gifts over $12,000 per year (or over $24,000 from married couples filing jointly) may be subject to federal gift taxes. (Consult the IRS or your tax advisor for the most current tax information.)
Can several people serve as custodians of an UTMA or UGMA?
No, there can be only one custodian on the account at any time.
What exactly does the custodian do?
Custodians are responsible for three functions:
- Make all investment decisions such as buying or selling shares and reinvesting dividends
- Authorize any changes to the account such as address changes or to arrange for an automatic investment plan
- Withdraw money from the account for the child’s benefit, including such expenses as education or a new bike or car
How are UTMAs and UGMAs taxed?
Income on the UTMA or UGMA is reported under the child’s social security number. For the 2006 tax year for a child under age 18, the first $850 of unearned income is federal income tax-free. Income from $850 to $1,700 is taxed at the child’s tax rate. Earnings over $1,700 may be taxed at the parent’s rate. For a child aged 18 or over, all income over $850 is taxed at the child’s rate. (Consult the IRS or your tax adviser for the most current tax information.)
When does the child take control of the assets in an UTMA or UGMA? And what is the “age of majority”?
When the child reaches the age of majority – that varies depending on the child’s residence and type of account (UTMA or UGMA) – the custodian must turn over the assets to the child. Once the child reaches the age of majority, he or she may use the assets for any purpose, regardless of the custodian’s wishes.
The information presented here does not constitute tax advice. State tax regulations may differ from federal tax regulations. Always consult your personal tax advisor before making any tax-related investment decision.