What Is a UGMA Account?

A UGMA (Uniform Gifts to Minors Act) account is a custodial account that allows adults to transfer assets to a minor without the need for a trust. This type of account is commonly used to gift stocks, bonds, mutual funds, and cash to children, providing a straightforward way to manage and transfer wealth.

Key Features of UGMA Accounts

1. Custodial Management: An adult custodian manages the account until the minor reaches the age of majority (usually 18 or 21, depending on the state).
2. Irrevocable Gifts: Once assets are transferred to a UGMA account, the gift is irrevocable. The minor is the legal owner of the assets.
3. Tax Benefits: Investment income may be taxed at the child’s tax rate, which is typically lower than the parent's rate.

How UGMA Accounts Work

1. Opening an Account: A custodian, usually a parent or guardian, opens the account on behalf of the minor.
2. Funding the Account: Assets can be added to the account over time. Common assets include cash, stocks, and bonds.
3. Account Management: The custodian manages the assets, making investment decisions until the minor reaches the age of majority.

Advantages of UGMA Accounts

1. Simple Setup: Easier to establish than a trust, with fewer legal complexities.
2. Financial Education: Provides an opportunity to teach minors about investing and financial management.
3. Flexibility: Funds can be used for any purpose that benefits the minor, not restricted to educational expenses.

Disadvantages of UGMA Accounts

1. Control at Majority: Once the minor reaches the age of majority, they gain full control over the assets. The age differs per state (e.g. In Washington state, the age of majority is 21) .
2. Financial Aid Impact: Assets in a UGMA account are considered the student’s assets, which can reduce financial aid eligibility.
3. Irrevocability: Gifts to the account cannot be taken back or redirected.

2024 UGMA Account Rules

1. Tax Changes: For 2024, the IRS has updated the thresholds for kiddie tax. The first $1,250 of unearned income is tax-free, the next $1,250 is taxed at the child’s rate, and any amount over $2,500 is taxed at the parents’ rate.
2. Contribution Limits: There are no specific contribution limits for UGMA accounts, but annual contributions should be mindful of gift tax exclusion limits ($18,000 per donor per child in 2024).
3. State-Specific Regulations: Some states have updated the age of majority rules for UGMA accounts. Check with your state’s regulations to see if the age of majority is 18, 21, or another age.

Wrap Up

UGMA accounts are a practical tool for transferring wealth to minors, offering simplicity and tax benefits. However, it's good to consider the implications, such as the loss of control at the age of majority and potential impacts on financial aid. I personally have started a small account for my kid to optimize the first $2,500 but slow it down until my kid gets to school before adding more consistently (will put more emphasis on 529 until then and then decide how to weight each one).