Magazine article The Exceptional Parent

Uniform Gift to Minors Account

Magazine article The Exceptional Parent

Uniform Gift to Minors Account

Article excerpt

It is not uncommon for family members--parents, grandparents, aunts, uncles, etc.--to want to give money to children. A chunk of dough received as one reaches adulthood can go a long way to help pay college costs, start a business or buy a house. Besides these boons, children with disabilities may have special needs to cover, as well. This article is about how best to give money to children with disabilities, considering tax, ownership and other investment issues.

The form

By law, a minor cannot own stocks, bonds or even mutual funds in individual or joint accounts. One alternative is to set up a Uniform Gift to Minors Account (UGMA). This is a trust that allows an adult to put money into an account holding a variety of investment vehicles--stocks, bonds, cash--for a child.

UGMAs operate under state laws and do not require the complex setup and administration normally associated with trusts. Banks, brokerage houses and mutual-fund vendors generally offer UGMAs.

An important thing to consider when setting up UGMAs for any child, however, is that gifting is a one-way street. Anything given to the child becomes his/hers upon reaching majority (18 or 21 years, depending on the state). It cannot be "given back" for supervision by the person who initially provided the funds. Also, despite the good intentions of the person setting up a UGMA, its results can complicate qualification for housing and/or government programs once a child reaches majority and takes possession of its assets.

This can mean the need for additional planning. If the child will not be able to handle the money and/or investments him or herself, a trust will need to be established to stand in the stead of a UGMA once the child reaches majority. This does not have to be set in place at the time the UGMA is established. However, such a trust will have to be ready at the point the child "comes of age."

UGMAs can be opened with minimal amounts and provide certain advantages. For example, they allow the adult custodian to make the investment decisions for the account. A tax advantage is that the earnings from the account are considered to be owned by the child rather than the donor/custodian. This means the tax on the earnings is estimated at the child's lower tax-bracket rate rather than the donor's higher tax-bracket rate.

Not that long ago, all earnings in these accounts were taxed at the child's rate. Congress thought this "unfair," so they created what became known as the "kiddie tax." This puts a damper on this type of family tax planning. Now, if the child is under age 14, his/her unearned income (as opposed to earned income, as from delivering newspapers) is taxed at the parent's rate except for first $1,300. What might this mean? Well, let's say the UGMA held $16,250 and earned eight percent during the year. That would come to an unearned income of $1,300. No taxes would be due. When the child turns 14, this all changes. Any income is then taxable at the child's rate.

The substance

That's the form of a Uniform Gift to Minors Account; now let's consider its substance--the assets it holds. Because UGMAs represent longterm investment, a large portion of these assets should be investments in the stock market--either mutual funds or stocks.

For the last 71 years, an investment in the stock market has had an overall return that averages over 12 percent. …

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