What Is the Uniform Gifts to Minors Act (UGMA)?

What Is the Uniform Gifts to Minors Act (UGMA)?

Let me explain the Uniform Gifts to Minors Act, or UGMA, directly to you. It's a law from 1956, revised in 1966, that allows adults—often parents or grandparents—to give assets to a child via a custodial account. You can transfer cash, stocks, bonds, mutual funds, or other securities without bothering with a trust. I open the account in the child's name, and everything in it belongs to the child, but I manage it until they reach the age of majority in their state. Compared to something like a 529 plan, UGMA gives you more flexibility on how the funds get used.

Key Takeaways

Here's what you need to know upfront: UGMA is your method for transferring assets to minor children. It sticks to cash and securities like stocks and bonds. The account belongs to the child, but you or another adult handles it until they're of age.

How a UGMA Account Works

Think of a UGMA account as a custodial setup designed to hold and protect assets for the beneficiary. You, as the donor, can name yourself, someone else, or even a financial institution as custodian. That custodian buys stocks, bonds, mutual funds, or other securities for the minor.

You open these accounts at banks or brokerages. Friends and family can contribute without any limits on amounts or income. Use after-tax dollars, so no tax deduction for you. Once deposited, it's irrevocable—permanent transfer to the minor, no take-backs.

Typically, you use UGMA assets for the child's education, but withdrawals work for any benefit to the beneficiary, with no penalties. Since the minor owns them, though, these assets count against federal financial aid eligibility for college.

When the minor hits the age of majority, they get full access and can use the funds however they want.

Special Considerations

The minor owns all UGMA assets and their income for tax purposes, but you might tax the earnings to the child or parent depending on amounts and age. Reporting varies accordingly.

UGMA can impact your lifetime gifting limits. If you die as custodian before transfer, the property goes into your taxable estate.

Uniform Gifts to Minors Act (UGMA) vs. Uniform Transfers to Minors Act (UTMA)

People often mix up UGMA and UTMA, and that's because UTMA from 1986 extends UGMA. Both require a custodian to manage assets until the beneficiary is of age, and gifts belong to the minor.

But UTMA covers any asset, like real estate or art, while UGMA limits to financial ones like cash, stocks, bonds, and insurance. UTMA lets kids invest without tax burdens, with gift tax exclusions up to $18,000 per person in 2024.

UGMA vs. 529 Plans

UGMA has no withdrawal penalties and flexible use, including education. But 529 plans are tax-advantaged specifically for education—tuition, equipment, living costs—from kindergarten up, including apprenticeships.

Anyone can open a 529, with high state-varying limits. Investments grow tax-deferred, and qualified withdrawals are tax-free. Types include prepaid tuition plans that lock in rates and savings plans like IRAs.

Advantages and Disadvantages of UGMA

UGMA accounts are straightforward to set up at a bank or brokerage, by anyone. No contribution or withdrawal limits, just watch IRS gift tax caps. You get flexibility—not just for education—and it skips trusts, making assets clearly the minor's.

On the downside, transfers are irrevocable, so no reversing. They can hurt financial aid eligibility since they're the child's assets. And no tax benefits like deductions or credits, unlike 529s.

Contribution Limits and Taxes

No hard limits on contributions, but they're gifts, so IRS caps apply—$18,000 per child in 2024 without tax, up from $17,000 in 2023.

For taxes, you might report on your return under kiddie tax if the child's unearned income is under $2,500 and they're young enough. First $1,250 tax-free, next at child's rate, excess at yours. Otherwise, the child files.

The Bottom Line

UGMA is a simple way to secure a minor's financial future with cash or assets, flexible for any purpose. But remember, no tax perks and irrevocable deposits. If unsure, talk to a financial pro.