Definition
The Uniform Gifts to Minors Act (UGMA) is a regulation in the United States that facilitates the transfer of assets to minors. The UGMA permits minors to receive gifts, including money, securities, and other property, without the need for a formal trust. The gift becomes the property of the minor, but it is managed by a custodian until the minor reaches the age of majority, which varies by state but is typically 18 or 21.
Examples
- Savings Bonds: Parents can open UGMA accounts and purchase savings bonds that will benefit their child’s education.
- Stocks and Mutual Funds: A grandparent might gift stocks to their grandchild using an UGMA account.
- Cash Gifts: An uncle could contribute cash to an UGMA account for his niece, allowing the money to be invested for future use.
Frequently Asked Questions
What can be contributed to an UGMA account?
You can contribute cash, securities (such as stocks and bonds), and certain other financial assets.
Who manages the UGMA account?
A custodian, who is usually a parent or guardian, manages the account until the minor reaches the age of majority.
Can gifts in an UGMA account be revoked?
No, gifts made under the UGMA are irrevocable. Once the gift is made, it permanently belongs to the minor.
What happens when the minor reaches the age of majority?
The minor gains control of the account and can use the assets in any way they see fit.
Are there tax benefits to using an UGMA account?
Yes, earnings from UGMA accounts are taxed at the child’s tax rate, which is typically lower than the parents’ tax rate.
Related Terms with Definitions
- Custodian: An individual who manages assets on behalf of a minor in an UGMA account.
- Irrevocable Gift: A gift that, once given, cannot be taken back or altered.
- Minor: A person under the legal age of majority.
- Securities: Financial instruments, such as stocks or bonds, that hold monetary value.
Online References
- Investopedia on UGMA Accounts
- IRS Topic No. 553 – Tax on a Child’s Investment and Other Unearned Income
Suggested Books for Further Studies
- Personal Finance in Your 20s & 30s For Dummies by Eric Tyson
- Savingforcollege.com’s Family Guide to College Savings by Joseph F. Hurley
- The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money by Ron Lieber
Fundamentals of Uniform Gifts to Minors Act: Finance Basics Quiz
Thank you for exploring the intricacies of UGMA accounts with us. Your understanding of how to manage gifts to minors, including handling custodial responsibilities and tax implications, is vital for effective financial planning. Continue to deepen your knowledge and stay informed!
