Uniform Gifts/Transfers to Minors Accounts

Uniform Gift to Minors Accounts (UGMAs) and Uniform Transfer to Minors Accounts (UTMAs) allow you to invest under a child's name with an adult as custodian. By law, minors (those under the age of 18 to 21, depending on your state) generally can't own securities, including mutual fund shares, outright. UGMAs and UTMAs are vehicles that allow minors to enjoy the benefits of owning securities within the limits of the law.

Who Can Invest?

Any adult can invest in an UGMA or UTMA on behalf of a minor. For the most part, any adult can also be the custodian of the account, though some states require the child's parent or legal guardian to fill this role. Gifts from an adult to a minor of more than $13,000 per year are taxable gifts and may be subject to gift tax. This tax is paid by the person making the gift.

Advantages

  • Unlimited Investments

    There is no limit to the amount of money that can be invested in an UGMA or UTMA, so you can use it to cover a significant portion of your child's college costs.

  • Tax Advantages

    Because the first several hundred dollars of earnings are not taxed, and a child's tax rate – 10% for most minors – is usually lower than an adult's, UGMAs and UTMAs can produce significant tax benefits for your family. (A child under 18 will pay tax at their parents' rate on investment income greater than $1,900.) The greater the difference between the child's tax rate and the parents', the greater the benefit of the UGMA/UTMA.

  • Flexible Contributions

    Any concerned adult – a grandparent, aunt, uncle, or godparent, for example – can establish an UGMA or UTMA.

Things to Consider

  • Assets Might Not Be Used for College

    Once the child takes control of the account, the child may then use the money for purposes other than education – regardless of the custodian's wishes.

  • May Reduce Financial Aid

    If your family is applying for need-based financial aid, having an UGMA or UTMA may reduce the size of the package.

Using the Money

If the child begins college before reaching the age when the custodianship ends, money in an UGMA or UTMA can be used to pay higher education costs, as long as the custodian agrees. When the child reaches the age when custodianship terminates, however, he or she takes complete control of the assets and can use them for any purpose.

When the account is still under the custodian's control, withdrawals from an UGMA or UTMA can be used to pay for special expenses – those beyond the normal costs of living. The custodian must agree to these withdrawals, however, and they must be for the child's benefit. There is no penalty if the proceeds are used to pay for non-educational expenses, regardless of the child's age.

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