What is the Uniform Minor Transfers Act (UTMA)?
The Uniform Transfers to Minors Act (UTMA) allows a minor to receive gifts, such as money, patents, royalties, real estate, and fine art, without the help of a guardian or trustee. A UTMA account allows the donor or designated custodian to manage the minor’s account until the minor is of legal age. It also protects the child from tax consequences on gifts, up to a specified value.
- The Uniform Transfers to Minors Act (UTMA) allows a minor to receive gifts without the help of a guardian or trustee.
- The minor can avoid the tax consequences until he reaches the legal age for the state.
- The donor may appoint a custodian, who has a fiduciary duty to manage and invest the property on behalf of the minor until the minor is of legal age.
Understanding the Law on uniform transfers to minors
Understanding the Uniform Transfers to Minors Act (UTMA)
The UTMA allows minors to receive gifts and avoid tax consequences until they are of legal age for the state, usually 18 or 21 years old. It is an extension of the Uniform Gifts to Minors Act (UGMA), which was limited to the transfer of securities and was finalized in 1986 by the National Conference of Commissioners on Uniform State Laws and adopted by a majority of the 50 states.
While the UTMA offers a way to create a tax-free savings account for minor children, the assets will be counted as part of the custodian’s taxable estate until the minor takes possession..
The UTMA is similar to the original version of the UGMA that was developed in 1956 and revised in 1966. The UGMA provides a way to transfer property to a minor without the need for a formal trust. It allows the property to be managed by a custodian designated by the donor. The property is then delivered to the minor when the minor reaches the age of majority in the state where the donation was made.
The UTMA incorporates the language of the UGMA and extends the original definition of gifts beyond cash and securities to include real estate, paintings, royalties, and patents. So while UTMA accounts allow parents to donate gifts like money, stocks, or life insurance, UGMA accounts only allow the donation of basic assets.
It is up to each state to adopt or amend the UTMA. For example, the state of Florida passed a statute in 2015 that allows property to remain in the hands of the UTMA custodian until the minor is 25 years old if desired.
Gifts are usually transferred when the minor reaches 18 or 21, although in some states it is possible to extend it to 25.
UTMA provides a convenient way for children to save and invest without bearing the burden of tax. As of 2018, the Internal Revenue Service (IRS) allows a gift tax exclusion of up to $ 15,000 per person for a qualifying donation, including donations to minors.
The child’s Social Security number is used for UTMA tax reporting purposes. It is also important to note that because assets held in a UTMA account are owned by the minor, this can have a negative impact when the minor applies for financial aid or educational scholarships.
The Law allows the donor to appoint a custodian, who has the fiduciary duty of managing and investing the property on behalf of the minor until the minor is of legal age. The property belongs to the minor from the moment the property is donated. If the donor dies while serving as custodian, the value of the custodial property is included in the donor’s estate.
What is the Uniform Minor Transfers Act (UTMA)?
As its name suggests, the UTMA is a law on the transfer of assets from adults to minors. The UTMA offers parents and other adults a tax-advantaged way to pass gifts on to minors without creating a formal trust. In doing so, the adult donating the gift would normally act as custodian of those assets until the minor reaches the legal age. Alternatively, the donor may also designate a third party to act as custodian of those assets.
What is the difference between the UTMA and the Uniform Gifts to Minors Act (UGMA)?
UTMA and UGMA have similar purposes, but there are important differences between them. In particular, the UTMA allows gifting a wider range of assets, including financial securities such as stocks and bonds. Additionally, the UTMA provides additional time for donated assets to reach their expiration dates, as in the case of a bond. On the contrary, the UGMA requires that the assets be assumed by the minor once the minor reaches the age of 18.
What are the advantages and disadvantages of using a UTMA account?
The main advantage of using a UTMA account is that the money contributed to the account is exempt from paying gift tax, up to a maximum of $ 15,000 per year. Additionally, any income earned from the contributed funds is taxed at the tax rate of the minor to whom the funds are awarded. Since the minor’s income is presumably significantly lower than that of the adult donor, this can lead to significant tax savings.
However, one of the downsides to using a UTMA account is that it can make the recipient less eligible for needs-based college scholarship programs and other similar initiatives.