Uniform Gifts to Minors Ac (UGMA)
Candlefocus EditorWith an UGMA account, a custodian is assigned to manage the account on the minor’s behalf. This is to ensure safeguarding and growth of the assets until the minor is old enough to manage their own account. The custodian may have the right to make use of the funds for the minor’s benefit during this period, including spending on educational expenses, health care, and other related costs. The account's earnings are not tax-sheltered, but they are taxed at the minor's lower kiddie tax rate, up to a certain amount.
UGMA accounts are considered irrevocable and are not eligible for any tax benefits to the donor. This means that once the money or property has been transferred to a UGMA account, the donor may not be able to take it back. This can be a downside to setting up a UGMA account, but it does ensure that the funds are available for the minor's use and are protected from creditors, should the donor later face financial hardship.
The UGMA account is a great way for family and friends to help a minor financially without the expense and time associated with setting up a trust. UGMA accounts can also help families manage college savings and make estate planning simpler and more efficient.
As a custodian, it is important to review the terms and conditions of the UGMA before opening an account, as well as any state-specific UGMA requirements. An attorney or a financial advisor can help guide through the account setup process and serve as the custodian if the donor chooses.