Uniform Gifts to Minors Act
What It Is
This is a special custodial account placed in your child’s name and social security number, with a parent named as custodian.
- A UGMA/UTMA custodial account allows you to transfer or gift assets to a minor without setting up a trust.
- The benefit of UGMA is that the income from interest, capital gains, and dividends is taxed at a lower rate for your child than if it was in your name.
- Other adults, such as family members, may also contribute to the account.
- You can contribute up to $14,000 per person per year free of gift tax.
A potential drawback, however, is that once your child reaches the age of maturity, the money belongs to them. And although you intended to spend it on tuition, your child might have other plans (e.g., a shiny new red convertible).
Custodial accounts might also hamper your ability to qualify for financial aid. If you think that your child might qualify for financial aid, avoid UGMAs and the newer UTMA (Uniform Transfer to Minors Act) which allows for transfer of real estate, life insurance, pensions, and other types of property.