A UGMA, which is also known as “Uniform Gifts to Minor Account” is something that is available in all 50 states, but it is not always available in the same way. The reason for this is that there are various statutes that regulate the accounts. In addition to the statues that regulate the account there is also the Uniform Transfers to Minors Act that goes along with the UGMA accounts in some states. Regardless of how the UGMA accounts are regulated, there are still some benefits to these types of accounts that you will not get from other investment accounts for minors
One of the best things about setting up a UGMA is that the gift, money that is sent to the account is tax free to donors. This means that if you are going to be giving a child an inheritance from your estate and they are a minor you should set up a UGMA account so that you can avoid the taxes that you would otherwise have to pay on the gift. This type of account can also lower your overall estate tax, and in some cases, it can even lower your inheritance taxes. The thing that you need to make clear is just because it is tax-free for the donors, which are the people putting money into the account, that doesn’t mean that it is going to be tax-free for the child when they decide to withdraw money from the account.
Another benefit to starting a UGMA account for a child is that it can provide the parent with a nice tax benefit. If a child has an UGMA account it can actually reduce their parents’ overall tax rate because of how the UGMA is taxed by the federal and state government. However, this is only going to help the parents out once the child reaches the age of 14. The reason for this is that once a child reaches the age of 14 they can start filing income taxes on any interest that they are earning or even on income, they are receiving. This lowers a parent’s tax rate because the UGMA once the child turns 14 is now taxed at the child’s tax rate. The best part is that the child’s tax rate is usually a lot lower than the parent’s tax rate. Not having to claim that money for their children can help put the parents’ in a lower tax bracket, where they get the lower tax rates.
Of course, along with the benefits of the UGMA account there are going to be some drawbacks to the account, so before you decide on if this is right for you and your child you should look at how the drawbacks are going to affect the benefits of the UGMA account.
The first drawback to this type of account is that the Uniform Gift to Minors Act specifically says that once you or anybody else has transferred money into the account you cannot take it back. The other bad part about this account is that once the child reaches a specific age, which is established by the state that you live in, they are going to be the only ones who can make a withdrawal on the account. This means you as a parent cannot control how the money is going to be withdrawn at that point. The good news about this type of account though is that up until they reach that maximum age the account has to have a custodian, in most cases this would be the parents of the child.
Something else to think about when setting up a UGMA is that they is designed to benefit the child that they are created for. If you decide to withdraw any money and the money that you withdraw does not go towards the benefit of the child the child can actually sue you to recover the money that you withdrew. At the same time if you set up the UGMA, you are also the custodian of the account, and something happens to you before the child reaches the maximum age so that they can be named as the beneficiary the account will be taxed as part of your estate.