UGMA/UTMA ACCOUNTS

Traditionally, it has been difficult and cumbersome for children to own property during their minority. The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) were created to streamline the process and permit children to own financial assets without the need for a special guardian or trust. As originally conceived, the UGMA applied only to certain intangible, financial assets. The UTMA expanded the types of property to include virtually any type of property, tangible or intangible, real or personal. Most states now have either the UTMA or an expanded version of the UGMA.

Under these laws, assets placed in the child's account belong irrevocably to the child. If Mom and Dad think they can get at the assets for their own purposes or to redistribute the assets to their other children, they are wrong. That's stealing from a child. Not a nice thought. There may be only one child and only one custodian per account. The custodian controls the investment decisions and the distributions from the account until the child reaches the age of majority.

In most states the age of majority is 21. A few states cling to 18 as the age of majority. Still fewer states may allow a custodian to continue to control the account until the child turns 21 even though 18 is the age of majority. Once the child reaches the age of majority, he or she controls the account. If the child wants to spend the assets foolishly, Mom and Dad generally have little or no legal recourse.

UGMA or UTMA accounts can be used to fund a 529 plan with the minor as beneficiary. It is important to note that the 529 plan will retain the characteristics of the UGMA or UTMA. Upon age of majority, the beneficiary will gain control of the assets.

When the assets are transferred to the account, the donor makes a gift of a present interest that qualifies for the $11,000 per year, per donee gift tax exclusion. For income tax purposes, the income generated in the account is taxed to the child. If the child is under age 14, the "Kiddie Tax" rules apply. Those rules tax the unearned income of a young child in excess of $1,500 at the higher of the parent's or the child's marginal rate.

If the custodian dies before the child reaches majority, a successor guardian must be appointed. Generally, this is the child's legal guardian, although some states may permit the custodian to name his or her own successor. If the donor of the gift to the account was also the custodian, the value of the account, for estate tax purposes, is included in the estate of the donor/custodian. This is very important to note if grandparents want to make gifts to their grandchildren in order to achieve estate tax savings. These grandparents should name one of the child's parents or some other adult, other than themselves, as the custodian. If the child dies before reaching majority, the account is included in his or her estate and will pass according to state law, frequently to the parents.

Of course, this brief article is no substitute for a careful consideration of all of the advantages and disadvantages of this matter in light of your unique personal circumstances. Before implementing any significant tax or financial planning strategy, contact your financial advisor, attorney or tax advisor as appropriate.

UGMA and UTMA accounts are extraordinarily useful tools for estate, college and general financial planning. They are simple to establish and inexpensive to administer. The many benefits and wide usage of these accounts makes it important to understand both their positive and negative aspects.