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The Uniform Gifts to Minors Act is a law that concerns assets — such as bank accounts, securities and brokerage accounts — that have been transferred to minors. The act is in effect in four U.S. states; the other 46 states and Washington D.C. have replaced it with slightly different legislation called the Uniform Transfers to Minors Act. Under either act, the assets transferred to a minor must be held by a custodian for the minor until he or she reaches a certain age. The law allows assets to be transferred without the need for a trust fund, and it allows them to be taxed based on the minor's tax bracket rather than that of the person who gave the gift, such as the parents of the child.
In the U.S., a uniform law is one that has been agreed upon by a national committee and adopted by legislators in each state. When states amend the laws, they are no longer uniform. The Uniform Gifts to Minors Act was superseded by the Uniform Transfers to Minors Act in most of the U.S. starting in 1986. Under the more recent act, the kind of assets that can be transferred to the minor are not limited, as they are under the earlier one. The age of maturity is also later under the Uniform Transfers to Minors Act, set typically at 21 (although it can be as old as 25), where it was usually 18 under the Uniform Gifts to Minors Act.
The minor’s custodian is responsible for controlling the assets and managing, holding, and investing the funds in the beneficiary’s best interest. He or she is typically compensated for performing these intermediary duties. After the child reaches the age of maturity, he or she gains control over the assets.
It would be a violation of the Uniform Gifts to Minors Act if when a parent or adult used the gift for his or her own purposes. Another violation of the would be if the gifter takes back or revokes the gift before the minor reaches the designated age of maturity. One disadvantage for the minor is that the assets will be counted against him or her during considerations for financial aid when he or she enters college.
When I worked in an investment office, I saw several custodial accounts that were set up as Uniform Gifts to Minors Act (UGMA) accounts.
Most of the time this was done for tax benefits for the parents. The funds were often invested in mutual funds. The advantage of this is that any gains were not taxed at the parents income tax bracket.
Although I could see the advantages of this, I am not sure it made as much sense later on down the road.
When the kids were old enough to apply for financial aid for college, they had to take into account the fund balance in their mutual fund.
This worked as a disadvantage instead of an advantage when it came to qualifying for financial aid.
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