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
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
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.
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
The UGMA to do list
If you still want to go for it, here's how to set
up a UGMA:
Go to a broker, bank or mutual fund manager.
Tell them you wish to open a UGMA (or UTMA).
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.
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