The Uniform Gifts To Minors Act or “UGMA” as it is more commonly known allow children to own securities. It is a more efficient and less costly alternative to having an attorney draw up a legal trust. An UGMA is a custodial account which allows an adult or legal guardian to invest on behalf of a minor child and as such, it carries a tremendous weight in terms of fiduciary responsibility. Although an UGMA account is not specifically designed to finance college or university expenses, it has become a popular vehicle for saving and investing for a child’s higher education. An UGMA account offers several distinct advantages:

• There are no income limits.

• There are no annual contribution limits. However, a gift tax may be applicable. Up to $13,000 a year can be invested in a UGMA account tax-free and married taxpayers who file jointly can contribute up to $26,000 (subject to change). The contributions are made with after-tax dollars.

• Anyone, such as a grandparent or aunt, can establish an UGMA on behalf of a minor child.

Opening And Managing An UGMA Account – Basic Guidelines

1. Has to be opened and managed as a cash account.

2. It is not tax-deferred.

3. Typically, an UGMA account is opened at a bank, brokerage firm or a mutual fund company.

4. The parent or legal guardian does not have to be the custodian. Another individual may be appointed to act as the custodian of the UGMA account on behalf of the minor child.

5. The custodian can buy and sell securities for the UGMA account as well as exercise warrants and rights.

6. The securities cannot be registered in street name. They must be registered in the custodian’s name for the beneficial owner who is the minor child.

7. The Social Security number of the minor must be provided on the UGMA account. The minor of the UGMA account must file an annual tax return.

8. The custodian of the UGMA account cannot purchase securities on margin, engage in risky investments such as commodity futures, options and highly speculative stocks. Real estate property cannot be held in an UGMA account. All investments for the UGMA must be appropriate for the benefit of the minor and in accordance to the fiduciary responsibility and the custodial relationship.

9. The custodian is not permitted to pledge the securities in the UGMA account as collateral for a loan.

10. Although more than one UGMA is permitted, every UGMA account must have only one custodian and one minor.

11. All gifts to the UGMA account are irrevocable.

12. If the minor of the UGMA account dies, the assets of the account pass onto his or her estate.

13. The assets of the UGMA account cannot be transferred to another child.

14. The minor does have the legal right to sue the custodian for unethical behavior and/or inappropriate management of the account.

15. All assets become the sole property of the minor upon reaching legal age (18 or 21, depending on the state).

16. Investment transfers are generally treated as a taxable event.

Tax Considerations For An UGMA

Currently, the first $950 of unearned investment income is tax-exempt for a child under the age of 18. The second $950 is taxed at the child’s rate. Any earnings over $1900 are generally taxed at the parents’ tax rate.

Closing Thoughts

As enticing as UGMA accounts may appear, there are two potential, worrisome drawbacks. The first and perhaps, most pressing concern is that once ownership of the assets of the UGMA account is transferred to the child upon reaching legal age, he or she can take full control of the money and use it for any purpose; anything other college, much to the dismay of the parent or legal guardian. Furthermore, since all contributions to the UGMA account are irrevocable, the donor cannot get the money back. The second, overriding concern is that an UGMA account may affect the child’s prospects for financial aid. The ultimate size of the financial aid package could be reduced due to the child owning an UGMA account. When assessing eligibility for financial aid, the child’s income will garner more weight than that of the income and assets of the parents.


For informational purposes and not intended as advice. Every attempt is made at accuracy, however, the author does not claim that the content is free of factual errors.