Uniform Gift to Minors Act

 (UGMA) and the Uniform Transfers to Minors Act (UTMA) are model laws developed and approved by the National Conference of Commissioners of Uniform State Laws and then proposed for adoption by all States through their State legislatures. Adoption of the model law is optional by the States and each State may make amendments to the Act. The UGMA was developed in 1956 and revised in 1966. The UTMA was finalized in 1986.

Uniform Gifts to Minors Act
All States and jurisdictions in the United States adopted the UGMA in some form. This Act allows donors to make gifts to minors that are free of tax burdens. Since the inception of the UGMA, many States have added amendments to expand the types of property that can be made the subject of a gift under the Act. As a result, the UGMA lost some of its original uniformity. Consequently, individuals making transfers under their State’s UGMA could not be assured that other jurisdictions would recognize the transaction and subject it to rules that were the same or substantially similar to the rules in their state.

Uniform Transfers to Minors Act
The UTMA offers all States the expansive approach some of them had already taken and makes a variety of other improvements over the UGMA. Under the UTMA, any kind of property, real or personal, tangible or intangible, can be transferred to a custodian for the benefit of a minor. Under UGMA, only gifts of cash or securities are permitted. The UTMA covers not only outright gifts, but also other transfers, such as payment of debts owed by a third party to a minor and transfers of property from trusts or estates. In some cases the minor’s own assets can be transferred to an UTMA.

The UTMA incorporates the provisions of UGMA and broadens the scope of the law to include not only gifts, but also transfers to minors.

Custodial accounts
In most states, minors do not have the right to contract, and so cannot own stocks, bonds, mutual funds, annuities and life insurance policies. In particular, parents cannot simply transfer assets to their minor children, but instead must transfer the assets to a trust. The most common trust for a minor is known as a custodial account (an UGMA or UTMA account).

The Uniform Gift to Minors Act (UGMA) established a simple way for a minor to own securities without requiring the services of an attorney to prepare trust documents or the court appointment of a trustee. The terms of this trust are established by a state statute instead of a trust document. The Uniform Transfer to Minors Act (UTMA) is similar, but also allows minors to own other types of property, such as real estate, fine art, patents and royalties, and for the transfers to occur through inheritance.

A custodial account, also known as Uniform Gifts to Minors Act/Uniform Transfers to Minors Act (UGMA/UTMA), gives you the flexibility to set aside money to pay for education or any expense that benefits a child. All funds in the account are considered a permanent gift that becomes the child’s assets once they reach vesting age.

Fairmark.com provides a comprehensive overview on the advantages and disadvantages of owning a custodial account.
 * Advantages of Custodial Accounts, June 14, 2018
 * Problems with Custodial Accounts, July 8, 2016

Taxes
A child's unearned income includes income produced by property given as a gift to the child. This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act.