Under the UGMA, you as an adult can set up a custodial account for a minor and put assets such as cash, securities, and mutual funds into it.
You pay no fees or charges to set up the account, and there is no limit on the amount you can put into it. To avoid owing potential gift tax, however, you may want to limit what you add each year to an amount that qualifies for the annual gift tax exclusion.
One advantage of an UGMA custodial account is that you can transfer to it assets that you expect to increase in value. That way, any capital gains occur in the account, and you avoid potential estate taxes that might have been due had you owned the asset at your death.
If you sell an asset in the account, taxable capital gains are calculated at the beneficiary's capital gains tax rate provided he or she is 18 or older. Taxable capital gains are calculated at the parents' rate if the child is younger than 18.
One potential disadvantage of a custodial account is that any gift to the account is irrevocable.
The assets become the property of the beneficiary from the moment they go into the account, even though as a minor he or she cannot legally control activity in the account or take money out. At majority, which occurs at 18 or 21 depending on the state, the beneficiary may use the assets as he or she wishes.
In addition, if you are both the donor and the custodian, and die while the beneficiary is still a minor, the assets are considered part of your estate. That could make your estate's value large enough to be vulnerable to estate taxes.
- Browse Related Terms: Back-up withholding, Custodial account, Estate, Estate tax, Gift tax, Income, Income in respect of a decedent, Income stock, National debt, Qualified domestic trust (QDOT), Revocable trust, Uniform Gifts to Minors Act (UGMA), Uniform Transfers to Minors Act (UTMA)