Uniform Gift to Minors Act
- The Uniform Gift to Minors Act lets individuals establish a financial account for a minor without a trust. Find out more about UGMA accounts from HelpAdvisor.
The Uniform Gift to Minors Act, or UGMA, lets people transfer assets to minors. This law exists in some states but not all. Find out more about the UGMA below.
What Is the Uniform Gift to Minors Act (UGMA)?
The Uniform Gift to Minors Act provides a way for individuals to transfer or give assets to underage individuals. This is usually done between parents and children. The amount given or transferred is typically free of federal gift tax, up to a certain amount ($15,000 for an individual, $30,000 for a married couple in 2020 and 2021). Gift tax rates vary among the states.
Assets are placed in an account on behalf of minors, and UGMA eliminates the need for an attorney to establish a trust fund on the minor's behalf. Establishing a formal trust can be time-consuming and expensive, which is why many people use the UGMA option.
How the UGMA Works
Suppose a parent wants to transfer assets to their 14-year-old child and doesn't want to establish a trust to do it. When the parent transfers funds to their child (the beneficiary) using the UGMA, the assets are protected and held in a financial account.
The parent has the option to appoint themselves, a financial institution or another person, such as a spouse, as a custodian. The custodian is then responsible for managing the account in the beneficiary's best interest. For example, the custodian can use the funds to purchase stocks, bonds and/or mutual funds on the minor's behalf.
People can open a UGMA account through a bank or brokerage institution. Once this is done, friends and family can make contributions to the account. UGMAs typically have no contribution or income limits.
What Are UGMA Funds Used For?
UGMA funds can be used for pretty much anything, although they are most often used to pay for education, such as college or grad school. The custodian can make withdrawals to cover any expenses that benefit the minor.
UGMA accounts also have no withdrawal penalties, unlike many other types of financial accounts.
UGMA funds can affect a minor's eligibility for financial aid when they apply to college. Since the account owner is technically the minor, the UGMA account is counted among assets if the minor applies for financial assistance.
Reaching the Age of Majority
When the minor reaches the age of majority and is no longer a minor, they have full access to their UGMA account and can use the funds as they please. The age of majority varies, but in most states it is 18. In Nebraska and Alabama, it's 19, and in Mississippi, it's 21.
Since contributions to a UGMA account are made with after-tax dollars, donors don't get an income tax deduction.