The Uniform Gift to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) are investment alternatives that allow an irrevocable transfer of ownership of property to children. These accounts allow a person to fund an account for a child, but limit that child’s access to the account until the child reaches the age of majority. The age of maturity is set by state law and typically ranges from 18 to 21. The child is the owner of the account, but the parent or other adult labeled as Custodian on the account controls the account until the child is no longer a minor. There is no maximum contribution limit on UGMA/UTMA accounts.
Custodial Accounts are not tax-deferred, and taxation of any income in the account will depend on income and the minor’s age. Any income from the custodial account must be reported on the child’s tax return and is taxed at the child’s rate. The parent is responsible for filing an income tax return on behalf of the child. Children aged 14 and older must sign their own tax returns. For financial aid purposes, Custodial Accounts are considered assets of the student, which will have an impact on financial aid eligibility.
Neither the donor nor the custodian can place any restrictions on the use of the money when the minor becomes an adult. At that time the child can use the money for any purpose without approval of the custodian. Redemptions can be made from a Custodial Account at any time while the child is a minor, as long as the proceeds are used for the benefit of the child (i.e. school expenses, camp, or a computer). However, these assets cannot be redeemed for any items that parents are normally responsible for (i.e. food, clothing, etc.). Lastly, an account is not transferable to another beneficiary since the account is in the name of a single child.