Considerations
The Uniform Gifts to Minors Act (UGMA) has been adopted in every state and the District of Columbia to facilitate gifts to minors. These laws serve to eliminate the requirements that a guardian be appointed or a trust established when a minor receives the donation of the gift.
UGMA originated in 1956 with the approval of the New York Stock Exchange, the Association of Stock Exchange Firms, and the American Bar Association. The UGMA has been revised twice, in 1956 and 1966. Please be aware that the UGMA has restrictions in certain states. These restrictions may limit the use of the UGMA to lifetime gifts and the types of property that can be given.
A gift made under the UGMA is the property of the minor. The custodian maintains control over the property and may act for the benefit of the minor, as deemed necessary. Once the minor reaches the age of majority, the custodian no longer has control over the property.
Warning: Your child may now use the proceeds of your gift to purchase a very expensive automobile. Of course we know that most children will use the transfer of wealth for their education, or to purchase a home. The real intent is to secure the financial future of your children and avoid federal gift taxes to the extent possible.
A gift to a child/minor under the UGMA is a completed gift for federal gift tax purposes at the time the gift was made. At least a portion of the earnings from the gift, depending on the use, may be exempt from federal income tax and some may be taxed at the child's lower rate.
Tax Point:
A parent can transfer up to $11,000 per year ($22,000 per year for a couple) to a child's UGMA account without being subject to Federal gift tax. Parents with appreciated assets should consider transferring assets to family members in lower tax brackets, including children over age 13 who are exempt from the "kiddie" income tax. If the assets produce income, relatives in lower tax brackets will have less income tax on the asset.
If the parent appoints him or herself as custodian and dies while serving in that role before the child's twenty-first birthday, the value of property transferred to the minor may be includible in the gross estate of the donor for federal estate tax purposes. Code Section 2038(a)(1).