A Uniform Gifts to Minors Act (UGMA) account is a custodial account that allows adults to make financial gifts to minors. While UGMA accounts can be a useful tool for financial planning, they come with both advantages and disadvantages.
When it comes to advantages, UGMA accounts are easy to set up and maintain and they offer flexibility in investment selection. The only requirement is that the money be spent for the benefit of the minor. Additionally, contributions to a UGMA account are considered completed gifts which can help reduce an individual’s estate for tax purposes if you are in that situation. Federal gift tax limitations do apply.
Income generated in a UGMA account may be taxed under the Kiddie Tax rules so it’s important to make sure they don’t apply to you. Additionally, once the minor reaches the age of majority (18 or 21 depending on state) they can use the funds as they see fit which may not align with the donor’s intentions and as mentioned before, gifts to these accounts are irrevocable. You cannot take the money back. Finally, UGMA accounts are considered an asset of the student when applying for financial aid and may reduce the amount of aid that a student is eligible to receive.
Before opening a UGMA account, it’s essential to carefully consider your financial goals, the age of the minor, and the potential tax implications as there may be other investment or savings options that are more suitable, such as 529 plans, custodial 529 accounts, or trusts. If you have more questions, feel free to reach out to a Francis LLC financial planner or a tax professional to make informed decisions based on your specific circumstances and current tax laws.