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What in the world is a Uniform Gift to Minors Account?

The Uniform Gift to Minors Account is the poor man's trust fund. Instead of paying big fees to some fancy-pants lawyer to set up a trust fund, a parent can invest in a custodial account for a child's future with some simple forms.

The purpose of this UGMA is to give little folks, i.e. those under 18, a way to own investments, especially ones that will grow faster than those measly savings bonds from the tradition-minded grandparents. Since, by law, minors generally can't own securities, the UGMA is a loophole of sorts. The money is in the kid's name, but the custodian (usually a parent) has control of the investments.

By the way, a few states extended the UGMA with the Uniform Transfer to Minors Act, to include real estate, fine art, patents and royalties. This is handy for passing good stuff along before the inheritance to avoid taxes. Gee, kids these days get everything!

Advantages

1. What can a UGMA do for the parent? Save on taxes, for one thing.

  • The first $700 of investment income is tax-free for the kid, and the next $700 is taxed at 15%.

  • Before the kid is age 14, any investment income beyond $1,400 is taxed at the parents' rate.

  • From 14 on, the income tax is at the kid's rate, usually 15%. Now, if you're kid is making enough money or investment income to get bumped up into another rate, you shouldn't be worrying about paying for college anymore.

2. Anyone, from the grandparents to the godparents, can establish a UGMA or UTMA, whereas other college-planning vehicles limit investing to parents or guardians. Additionally, there is no limit on the amount invested, unlike the $500-a-year Education IRA.

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Keep in mind that contributions of more than $10,000 will be slapped with a gift tax. But if your family is throwing that kind of money around, why not just find a lawyer and get a real trust fund?

3. Money in a UGMA can be used before college, "for the good of the child," but only for expenses for the child-owner of the account.

Disadvantages

1. One big catch to the UGMA is the investment belongs to the child. The parent can't take the money out and use it for some other purpose -- which protects the child's future. Then again, that means the money can't be used for another child's education if the first child chooses to become a potter or something.

2. More frighteningly, unlike a trust fund, the parent can't set the age for the child to receive the UGMA money nor designate a specific use for the money.  Well, sure, you can tell the child the money is for college. But once the child legally becomes an adult at 18, the money is to do with as he or she pleases. In other words, your high school graduate could decide to blow $20,000 in Cancun rather than on a year's tuition at Columbia.

A small bit of good news: A few states, including New York, make it possible to establish a turnover age of 21. UTMA accounts have more options for postponing the distribution age.

If you cringe at the thought of hearing "Seeya!" shouted out of your teenager's brand new convertible, you might want to find alternative college planning.

3. Another potentially expensive snafu is that a UGMA can decrease a kid's chances for financial aid. If your family may qualify for need-based financial aid, the money in the kid's UGMA could limit the aid package. The more money in the kid's name, the more will be designated for college before any financial aid consideration. Colleges and scholarships look to parents to use approximately 6 percent of their assets toward the child's education. However, they require 35 percent of the kid's assets be considered before assessing need.

The UGMA to do list

If you still want to go for it, here's how to set up a UGMA:

  1. Go to a broker, bank or mutual fund manager.

  2. Tell them you wish to open a UGMA (or UTMA).

  3. Assign a custodian. Be sure to assign a successor custodian, or court action will complicate life if the custodian dies before the child is 18.

  4. You'll need the minor's Social Security number for the Taxpayer ID.

Again, the money belongs to the minor, and the custodian has a legal fiduciary responsibility to handle the money in a prudent manner for the benefit of the minor. In other words, no blowing it on trips to Cancun for yourself.

-- Posted: May 17, 2000

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