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What is the Uniform Gift to Minors Act?
The Uniform Gift to Minors Act (UGMA) comprises state laws in the United States that permit the gifting of securities and money to minors. Once granted, the property becomes the minor’s asset and receives certain preferential tax benefits. A custodian controls the assets until the child reaches the age of majority. The individual who gifts the assets to the child may also act as the custodian for the account.
Originally instituted in 1956, the purpose of the UGMA was to create a simple way to pass assets to minors without having to set up a trust fund or involve an attorney in the transaction.
Custodians for UGMA assets have a legal responsibility to responsibly manage the assets. Minors assume responsibility of the account when they reach the stated legal age. For some states, this is 18 years of age, but in others it is 21 or 25.
The custodian may use the assets to purchase securities on behalf of the minor. As long as the transaction benefits the minor, the custodian can make withdrawals from the account. If the donor dies before the minor reaches the age of majority, the UGMA assets become part of the donor’s estate.
The Uniform Transfers To Minors Act (UTMA) is a related law adopted by most states that satisfies Internal Revenue Service (IRS) gift tax rules for granting up to $14,000 in assets tax free. This law extends the UGMA by allowing gifts of real estate and other property.
Ready to start your own child on the right financial footing? See how much an UGMA account can grow to with the Bankrate savings calculator.
Uniform Gift to Minors example
Hank wants to give his teenage son $10,000 of his assets, so he sets up an UGMA account. The assets legally belong to his son, but Hank is the named custodian and makes all decisions concerning the disposal of the assets until his son comes of age. Hank’s son wants to attend music camp for the summer, so he draws on funds in the UGMA account to pay for his room and board. The rules prevent him from using UGMA funds to buy himself a vintage Martin D-28 guitar.