The Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) provide a way for parents to maintain control over property that is owned by their children. The Uniform Transfers to Minors Act provide some unique advantages for families and should be considered by parents who are looking to transfer wealth to their minor children.
Some of the advantages of the Uniform Transfers to Minors Act include:
- Automatic Designation of the Property in a Trust without Having to Incur the Expense or Effort to Establish a Separate Trust: trusts created pursuant to this Act are typically made up of securities or other holdings. When the securities are purchased they are purchased in such a way as to make the parent the custodian for the child who owns the interest. For example, you might see the account set up as Mother Jones as custodian for Boy Jones pursuant to the Uniform Transfers to Minors Act.
- Tax Benefits for the Parent: the earnings on the investments are reported to the IRS and state taxing authority under the child’s social security number. Typically, the child has a much smaller income than the parent and is taxed at a much lower rate, if at all. Therefore, more of the earnings remain in the investment and less goes to the government.
While it is easy and often financially advantageous to purchase securities or other investments pursuant to the Uniform Transfers to Minors Act, families should be aware of the following limitations:
- A college or university may consider the value of these accounts when deciding on financial aid for the child.
- Once the child reaches the age of majority, the child has unrestricted rights to the account. That age may be 18 or 21 depending on how the term is defined in a particular state’s Uniform Transfer to Minors Act. Parents may be concerned about the child’s maturity and ability to responsibly handle the assets at that time but, unlike a traditional type of trust, there is nothing that a parent can do to raise the age limit for asset access.
- The assets of an account established in this way are irrevocable. A parent may, for example, establish an UGMA or UTMA account with the intention that the child will use the money for college or to purchase his or her first home. While that may be the parents desire there is nothing that a parent can do under the law to enforce their wishes. If the child wishes to use the money to backpack through Europe or to donate every cent of the money to his or her charity of choice then the parent cannot legally stop the child from doing so even though those were not the intended purposes of the account.
For many families, the Uniform Gift to Minors Act and the Uniform Transfers to Minors Act are worthwhile investment tools. However, it is important that parents seek the advice of their attorney prior to establishing such an account in order to determine if it is the best vehicle to accomplish the parents’ goals.
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