Until the Tax Reform Act (TRA) of 1986 changed the favorable tax status of Uniform Gift to Minors Act (UGMA) and its successors, the Uniform Transfers to Minors Act (UTMA) adopted by the National Conference of Commissioners of Uniform State Laws in 1983. Many people used these accounts as a means of transferring highly taxable income and capital gains to a child in a lower tax bracket through gifts of money or securities. (Children are normally in a low tax bracket and subject to lower taxes on most types of income.) Even though the tax advantages are not as great these days, many people still use these accounts to set aside money and securities for the benefit of children.
UGMA and UTMA accounts require an adult (or a bank trust department) to act as custodian for a minor (the beneficial owner). Any kind of security – cash, life insurance, annuity contracts and other forms of property_ – may be given, and there is no limitation on the dollar amount of the gift. However, there is a limit on how much can be given tax free. Currently the IRS will allow gifts up to $14,000, or $28,000 jointly with your spouse on an annual basis. In 2013 the IRS allowed you to give to as many people as desired in cash, investments, and/or property without causing a mandatory filing of Form 706 of the IRS Gift Tax.
The custodian may be either the donor or a person appointed by the donor, but not necessarily a family member. A gift to a minor under the UGMA or UTMA is irrevocable; the donor may not take back the gift, nor may the minor return the gift until he or she has reached the age of majority or the age which the laws of his or her state have set as the age when the custodianship will terminate (which varies from state to state). When the beneficiary reaches the specified age, the property in the accounts is transferred into his or her name.
The following regulations apply to gifts of securities to minors:
Securities delivered to a custodian or held for a custodian’s account may not be listed in street name. Certificates must be registered in the custodian’s name as “Custodian for (minor’s name) under (state’s name) Uniform Gifts (Transfers) to Minors Act.” The gift is considered to have been made when this registration has been completed.
No special documentation naming the custodian is required to open a brokerage account under UGMA or UTMA.
Securities donated as a gift must be fully paid; margin accounts are not permitted.
Bearer securities are generally not permitted, but if they are, gifts of bearer securities must be accompanied by a deed of gift.
Options may not be placed or purchased in a custodial account because no evidence of ownership is issued to an option buyer.
There may be only one custodian and one minor per custodial account.
In some states, a gift under this law may be made through a will, trust or estate.
The death of a child before the age of majority terminates the custodianship; the property in the account must be delivered to the minor’s estate.
If the custodian resigns or dies, the court assigns a succeeding custodian unless someone else has been assigned by the former custodian.
The registered representative (stockbroker) or banker is not responsible for determining whether the appointment is valid or whether the custodian’s activities are actually within his or her authority. However, the registered representative should determine whether securities being given are already owned by the minor.
Cash proceeds from sales or dividends may be held in a noninterest-bearing custodial account for a reasonable period, but should not remain idle for long.
Stock subscription rights or warrants may be either exercised or sold.
The custodian may use custodial property for the support, education and general use and benefit of the minor. The custodian is empowered to buy or sell securities in the account as long as the assets in the account remain property of the minor. In final, the custodian may be compensated for reasonable services and reimbursed for necessary expenses.
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Bart Ward is the chief executive officer of Ward & Co. Ltd., an Anoka-based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.