UGMA/UTMA Accounts

If a donor wants to donate money for the benefit of a minor, all she has to do is set up the account as either an UGMA or UTMA account.

UGMA stands for "Uniform Gifts to Minors Act" and UTMA stands for "Uniform Transfers to Minors Act." All states except Vermont and South Carolina have now adopted UTMA laws, which supersede UGMA laws. Either way, the child is going to eventually be in control of the assets, either at age 18 in a few states or age 21 in most states. There are even a few states that allow the transfer to happen as late as age 25, but that is the maximum and not typical. The state used is typically where the minor resides, although it could be where the custodian resides.

Setting up the account requires no supporting documentation. The donor needs the minor's social security number and provides the tax ID number of the custodian. The donor often manages the account as the custodian, although the two could be different parties, as well. If the donor is trying to minimize the size of his estate to avoid estate taxes, he will typically appoint another party as the custodian. Otherwise, the assets would be counted under his estate.

Either way, the account is opened as UGMA or UTMA, with just one adult custodian and one minor child per account. You can't have two adults as custodians, and you can't have more than one minor child per account. You also can't have a corporation or a partnership acting as the custodian. Only an adult human being can serve in that role. And, that adult is a fiduciary, meaning if he "invests" the money at the racetrack or tries to engage in naked options, he could be forced to refund any losses caused by his lack of prudence.

if you want to establish an UTMA for your niece, whose parents oppose the gift, SO if you have the minor's social security number, you can open the account. The minor's parents have no access to the account that you will set up and/or manage as custodian. In fact, one could probably keep the minor in the dark about the existence of the account.

A proper title for an UTMA account would look like this:

 Mark Michelson, as Custodian for Michael Michelson under the Illinois Uniform, Transfers to Minors Act. The adult custodian is the "nominal owner" while the beneficiary is the "beneficial owner" of this account. The gifts are considered "irrevocable and indefeasible," which means they cannot be taken back or treated as loans to be repaid.

When the beneficiary reaches the state's age of majority (adulthood), there is nothing the donor or custodian can do to stop him from selling off all the securities and buying a Corvette. In a formal trust account, that sort of thing can be avoided. But an UTMA/UGMA account is a "trust" whose terms are drawn up in state law, as opposed to a formal trust account in which the trust documents stipulate the terms.

Of course, there is no reason to assume all young adults would be foolish with the account assets.

Parents might set up an UTMA account so that the child at age 21 has money to make a down payment on a house or start a business. But, what the parents intended as a down payment on a house could, again, be spent on anything the new adult wants, instead.

Since the child won't need the money for, say, eight years, surely the adult custodian can sort of "borrow" from the account from time to time as needed, if she repays it eventually, with interest, right?
Wrong. These accounts receive special tax consideration, so if the custodian is pretending the account is an UTMA account, but uses it to get interest-free loans, the IRS might start talking about tax fraud, back taxes, and penalties-plus-interest.

Is room and board would be a legitimate expense to be covered by an UTMA account, the answer is no. Room and board is something parents are expected to provide to their children, and not through some tax-advantaged account.

Setting up UTMA/UGMA accounts requires no legal work, making it much cheaper than establishing a formal trust account. These days, investors typically use 529 Plans to save for college rather than custodial accounts, because assets in an UTMA/ UGMA count against the child's chances of receiving financial aid more so than as¬sets in a 529 Savings Plan.