Uniform Gifts to Minors Act
Encyclopedia
The Uniform Gifts to Minors Act, commonly known as UGMA, is an act in some states
of the United States
that allows assets such as securities
, where the donor has given up all possession and control, to be held in the custodian's name for the benefit of the minor without an attorney needing to set up a special trust fund. This allows a minor in the United States to have property set aside for the minor's benefit and may achieve some income tax benefit for the child's parents. Once the child reaches the age of maturity (18 or 21 depending on the state), the assets become the property of the child and the child can use them for any purpose. Contributing money to an UGMA account on another person's behalf could be subject to gift tax
however the Internal Revenue Code
of the United States allows persons to give up to the annual gift tax exclusion to another person without any gift tax consequences as long as total gifts are below the lifetime limits.
In the majority of states that have adopted the Uniform Transfers To Minors Act
(UTMA), the assets are treated similarly. The assets are held in the custodian's name until the child reaches age of majority. States that adopted UTMA also repealed UGMA; UTMA specifically provides that contracts in UTMA states which reference UGMA are governed by UTMA. Thus, UGMA is often still referred to in contracts designed for use in multiple states, even though it may actually mean UTMA in a particular state. Under the UGMA or UTMA, the ownership of the funds works like it does with any other trust and the donor must appoint a custodian (the trustee) to look after the account for the benefit of the beneficiary.
A UGMA or UTMA account allows the assets to be taxed at the minor's income tax
bracket. With the increase in the age from 18 to 24 where the kiddie tax
is imposed, the tax advantage of a UGMA or UTMA is decreased. For the 2009 tax year, only approximately $1,900 of the child's unearned income can avoid being taxed at the child's parent's tax rate. Minors can also invest in the stock market.
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...
of the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
that allows assets such as securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
, where the donor has given up all possession and control, to be held in the custodian's name for the benefit of the minor without an attorney needing to set up a special trust fund. This allows a minor in the United States to have property set aside for the minor's benefit and may achieve some income tax benefit for the child's parents. Once the child reaches the age of maturity (18 or 21 depending on the state), the assets become the property of the child and the child can use them for any purpose. Contributing money to an UGMA account on another person's behalf could be subject to gift tax
Gift tax
A gift tax is a tax imposed on the gratuitous transfer of ownership of property. The United States Internal Revenue Service says a gift is "Any transfer to an individual, either directly or indirectly, where full consideration is not received in return."When a taxable gift in the form of cash,...
however the Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
of the United States allows persons to give up to the annual gift tax exclusion to another person without any gift tax consequences as long as total gifts are below the lifetime limits.
In the majority of states that have adopted the Uniform Transfers To Minors Act
Uniform Transfers To Minors Act
The Uniform Transfers To Minors Act is a uniform act drafted and recommended by the National Conference of Commissioners on Uniform State Laws in 1986, and subsequently enacted by most U.S...
(UTMA), the assets are treated similarly. The assets are held in the custodian's name until the child reaches age of majority. States that adopted UTMA also repealed UGMA; UTMA specifically provides that contracts in UTMA states which reference UGMA are governed by UTMA. Thus, UGMA is often still referred to in contracts designed for use in multiple states, even though it may actually mean UTMA in a particular state. Under the UGMA or UTMA, the ownership of the funds works like it does with any other trust and the donor must appoint a custodian (the trustee) to look after the account for the benefit of the beneficiary.
A UGMA or UTMA account allows the assets to be taxed at the minor's income tax
Income tax in the United States
In the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...
bracket. With the increase in the age from 18 to 24 where the kiddie tax
Kiddie Tax
The kiddie tax rule exists in the United States of America and can be found in , which “taxes certain unearned income of a child at the parent’s marginal rate, no matter whether the child can be claimed as a dependent on the parent’s return.” -Background:...
is imposed, the tax advantage of a UGMA or UTMA is decreased. For the 2009 tax year, only approximately $1,900 of the child's unearned income can avoid being taxed at the child's parent's tax rate. Minors can also invest in the stock market.