UGMA and UTMA Overview
The Uniform Transfer to Minor’s Act (UTMA) and Uniform Gift to Minor’s Act (UGMA) were acts of congress that were designed to give individuals a way to set aside assets for minor’s until they reach the age of adulthood. The differences between the two are minimal and have to do with the way in which each state adopted the congressional act. For most purposes the names, UGMA/UTMA can be used interchangeably. There are some contracts that refer specifically to UGMA accounts. But if these contracts are used in UTMA states, the law permits UGMA to be defined as UTMA. In other words, if you are in a state that adopted UTMA, then even if your contract states UGMA, it is an UTMA contract. The point is one for lawyers really, the fact is that for most uses, each act, UGMA or UTMA, operate in the same manner and have the same guidelines and rules.
Though the acts cover all types of assets the primary way that most people encounter UGMA/UTMA is when they are dealing with bank accounts. These bank accounts became popular because it was a way to transfer assets to the minor and allow the gains on the accounts to be taxed at the minor’s tax bracket. These accounts also became popular as a way for individuals to set aside money, for the future benefit of the minor, that was legally protected from being used in any other manner. This way the donor could be assured that the money would not be used by the custodian of the funds for any other purpose.
Advantages and Disadvantages of UGMA and UTMA
When an asset is transfered to an UGMA/UTMA the donor must appoint a custodian for the account as well as name the minor for whose benefit the asset is being held. At this time the donor is also oftentimes asked to name the successor custodian in case the original named custodian is unable to perform their duties. This naming of the successor custodian gives an assurance to the donor that the even if the first named custodian is not able to perform their duty, the next custodian is still someone that they can trust.
The advantage to this overall arrangement is that the donor does not need to hire an attorney or go through any legal procedure other than transferring the proper ownership of the asset to the UGMA/UTMA account. This makes it simple to transfer assets to a minor, in a custodial account, and allows the donor an assurance that the transfer is legal and standardized. Once the asset is transferred it is then taxed to the minor. This is an advantage because normally,the minor is in a lower tax bracket than the donor.
There are several disadvantages to this overall arrangement and has caused some donors to move to other types of custodial accounts when transferring assets to minor’s. The first disadvantage is that the donor loses full control of the asset. This loss of full control can lead some donor’s to be hesitant to transfer assets to the minor. This is a problem when the accounts are set up for purposes such as a college education for the minor. The loss of total control of the asset is also a concern for the donor because they may want the funds used for a specific purpose, and if it is not used for that purpose, they want the funds returned. For example, if the donor wanted the minor to use the funds for college or a first home, they cannot pull the money back if the minor wishes to use it for a different purpose. Whereas in other types of trusts, money can be set aside for specific purposes and withdrawn if it is not used for that purpose.
UGMA & UTMA – Eligibility Rules, Contribution Rules, Withdrawal Rules and Leftover Funds
Anyone that wishes to transfer an asset to a minor using UGMA/UTMA tilling can do so without restriction. But there are consequences to the transfer if it surpasses certain limits. If the asset is larger than the allowable gift tax, then the donor’s contribution will be taxed. If the contribution surpasses other limits, there will be a consequence. You need to consult your tax advisor for federal as well as for the state the donor lives in and the state where the minor lives.
Withdrawals can be made for any purpose that is for the benefit of the minor. These withdrawals need to be documented by the custodian. The custodian must always be able to justify any withdrawal that they have made from a UGMA/UTMA account that they control. It is advisable that they keep very good records, this is not difficult, but is a necessary step that the custodian must take.
Unused and Leftover funds in a UGMA /UTMA account are supposed to be distributed to the person for whom the account was first set up to benefit. When the donor first opens the account they specify the age at which they wish the minor to receive full benefit of the asset. This is normally 18, 21, or 25. When the minor reaches that age, any leftover funds are distributed to their name.
Overall the UTMA/UGMA accounts are simple ways to transfer assets for the sole benefit of a minor. The process is simple and straightforward and there are no complicated decisions to be made or complicated paperwork to handle. Of course everyone wants an exception to the standardized UGMA/UTMA rules and this has led to a large number of similar asset transfer vehicles, each of which cater to the particular concerns of the donor. These hybrid UGMA/UTMA custodial accounts can be obtained from any broker or tax advisor. In the end it all depends on the donor’s specific intent in giving the funds as well as how much control they wish to give to the minor and when they wish that control to be transferred. But if you prefer simplicity, and if you wish to give to a minor, the UGMA/UTMA accounts are the easiest method to use.
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