In our next article in our series of custodial accounts we take a look at the eligibility rules, contribution rules, withdrawal rules and leftover funds when it comes to custodial accounts such as the UGMA and the UTMA. For those of you who need more details of both Uniform Transfer to Minor’s Act (UTMA) and Uniform Gift to Minor’s Act (UGMA), read the detailed overview of UTMA & UGMA. Also next, read about the advantages and disadvantages of UGMA and UTMA.
When it comes to UGMA/UTMA accounts the good news is that there are no real restrictions. At least not any restrictions that directly pertain to the accounts themselves. There are advantages and disadvantages to contributing more or less to a single UGMA/UTMA account. But the UGMA/UTMA act itself does not set any true restrictions.
UGMA and UTMA Eligibility Rules
The eligibility of a donor to set up and establish a UGMA/UTMA account is only limited by the restrictions of the institution where they wish to open the account itself. Most institutions will allow any donor to establish an UGMA/UTMA account for any named minor without regard to the relation between that donor and the minor. The institution will normally insist that the donor provide them with the birth date and social security number of the minor. There are times when a social security number will not be required, but because the gains on the account will be taxed to the minor, the account will be subjected to backup withholding if their is no social security number provided. The institution will allow the donor to designate their own name as custodian but they will need to have some contact information for the designated successor custodian. The donor will also need to specify an age where any funds that have not been distributed by the custodian for the benefit of the minor, are distributed directly to the minor. If the donor wishes to establish an account and not be the primary custodian, most institutions will require the primary custodian to be present on establishment of the account.
UGMA and UTMA Contribution Rules & Restrictions
There are not any true contribution rules or restrictions for a UGMA/UTMA account. All the donor needs to understand is that once the money is given, it cannot be taken back. There is no regard for the intent of the donation. The money must be used for the benefit of the minor until they reach the age of majority. As long as that condition is met, the funds cannot be restricted in any other way. This means that a contribution can never be retrieved by the donor if they feel the money is being wasted on a wayward child. Contributions are also subject to Federal as well as State tax rules. This means that you need to be aware of the tax implications of any contributed funds to a UGMA/UTMA account. These tax implications may affect the donor as well as the minor for whom the account is set to benefit.
UGMA and UTMA Withdrawal Restrictions
Withdrawals from the UGMA/UTMA accounts are subject to a single restriction. They must be made for the benefit of the minor. This is a vague description and the interpretation of which has been litigated repeatedly across the United States. My suggestion is that if the money is being withdrawn, that the custodian make certain they can document the way in which the money was used specifically for the minor in whose name is on the account. If the custodian plans to take the whole family on vacation and claim it was for the benefit of the minor, they may have a problem. The same thing applies if they take everyone out for a meal, the question of whether the funds went strictly for the benefit of the minor or not could be litigated. In the end, the custodian needs to make certain that all withdrawn funds from a UGMA/UTMA are documented as being used specifically for the minor.
Leftover funds that have not been distributed by the custodian for the benefit of the minor become accessible directly by the minor when they reach the age that was first designated on the establishment of the account. This means that they can walk into the bank on their birthday and pull out all of the money. I suggest that if all of the money has not yet been used, that it be transferred to some other type of custodial account for the benefit of the minor before they reach the designated age.
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