A Look at Uniform Gift to Minors Act Accounts

Uniform Gifts to Minors Act accounts are financial instruments made possible via The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). These two related acts are U.S. law established in the 1950's and 1980's to allow parents to transfer assets and/or financial gifts to children.

Under the UGMA and it's 1986 adjustement i.e. The Uniform Transfers to Minors Act, custodial accounts can be established to transfer assets to children. This article will illustrate how to set up a UGMA and/or UTMA account , the types of accounts and/or assets that can be transferred, in addition to advantages and disadvantages to UGMA and UTMA accounts.

How to obtain a Uniform Gift to Minors Act account

A Uniform Gift to Minors account can be established through a financial institution that allows accounts for the specific assets involved. For example, if the assets include stocks, then a custodial account can be established through a brokerage firm.

This involves simply calling the brokerage and asking them for the appropriate application documents to establish the account. To prepare for and obtain a Uniform Gift to Minors account the following steps may be helpful:

Step 1: Identify future benefits a UGMA account may offer a child
Step 2: Assess the benefits of the account
Step 3: Weigh the disadvantages of the account in terms of disposable income, tax law, and other children
Step 4: Locate financial institutions offering UGMA 'custodial accounts'
Step 5: Compare the strengths and weaknesses of the various UGMA accounts

Types of UGMA accounts

The Uniform Gifts to Minors Act and the Uniform Transfer to Minors Act allow the establishment of what is called a 'custodial account'. This is an account that is contributed to by a benefactor and managed by a custodian until the child reaches the age of transfer mandated under State law. Custodial accounts (invest.faq.com) are offered by a number of financial institutions and can include a diverse range of financial instruments. The following list provides examples of the types of UGMA custodial accounts that may be opened for a child.

• Bank accounts
• Brokerage accounts
• Mutual funds
• Money market accounts

Alternatives to custodial accounts include life insurance polices, individual retirement accounts, trusts, and college 529 accounts. These other accounts may be just as beneficial to a child depending on both the contributors financial goals and the child's future needs and potential benefits.

Advantages and disadvantages of UGMA accounts

The benefits of the Uniform Gifts to Minors Act and Uniform Transfer to Minors Act are primarily focused on the beneficiary, in such case, the child. A disputed area of this Act is in distinguishing between gifts and support through the accounts (beginnersinvestabout.com)

That is to say, gifts that benefit children outside of the parents responsibility to support them are acceptable under the act, however the definition of support varies from household to household, and State to State. Additionally, the U.S. Internal Revenue Service (IRS) (irs.gov) contends adjustments of the "designated beneficiary" after the establishment of a UGMA account may be in violation of the Acts principles and constitute tax evasion.

That said, and assuming no disputed areas of interpretation of the Uniform Gifts to Minors Act exist, the advantages and disadvantages of UGMA accounts are fairly clear and pertain to issues such as estate tax, a child's future needs, qualification for financial aid, number of beneficiaries and contributors taxable income and net worth. These benefits and disadvantages are listed below to illustrate and inform the potential financial scenarios UGMA accounts make possible.

Advantages

• Can qualify the contributor to reduced taxable income up to $12,000.00
• Assists a child in financially preparing for the future
• Makes possible the avoidance of higher estate tax
• May reduce parental financial obligations later in a child's life

Disadvantages

• Reduces qualification for financial aid
• Money contributed through UGMA is money gone
• Taxes may still be incurred by UGMA accounts
• Estate tax inclusions for UGMA account custodians
• Can only include one child as beneficiary

Summary

The Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act make possible special accounts that are composed of gifts to children that contribute to their benefit upon age of maturation. These accounts become the property of the child upon creation and are managed by the 'custodian' who is not necessarily the contributor to the account. UGMA accounts may be part of a child's future portfolio or a single account created to benefit the child in the future.

There are several other types of accounts that may be created alongside of and/or instead of UGMA accounts and therefore the decision to open a Uniform Gift to Minors account might be better weighed carefully in light of potential advantages and disadvantages as listed in this article. In essence, the UGMA account is a benefit to the child for whom the account is created. Other purposes of the account such as tax benefits can be considered secondary to the primary purpose of assisting subsequent generations succeed and benefit financially.

Sources:
1. http://www.law.upenn.edu/bll/archives/ulc/fnact99/1980s/utma86.htm
2. http://invest-faq.com/articles/tax-ugma.html
3. http://www.irs.gov/irb/2008-09_IRB/ar17.html#d0e2932
4. http://beginnersinvest.about.com/od/ugma/UGMA.htm
5. http://www.investopedia.com/terms/u/ugma.asp
6. http://tinyurl.com/6bdwmpn