What Are UGMA and UTMA?
UGMA and UTMA permit the transfer of funds to a custodial account for the benefit of a minor. The custodian manages the account under rules provided by state law. Whether an account is an UGMA or UTMA depends on the applicable state law. At this time, most states have opted for the UTMA. The transfer to the custodial account is considered an irrevocable transfer, subject to the gift tax. As a result, the donor’s gift qualifies for the $10,000 gift tax annual exclusion. A husband and wife together can contribute $20,000 per year, per child, to custodial accounts. Potential Tax Advantages Because special tax rules apply to the unearned income of a minor, an UGMA/UTMA account may help reduce taxes and can potentially build a larger fund over the long term. As a general rule, assuming the child does not have any income from employment, the unearned income (such as interest, dividends and capital gains) of minors is taxed as follows: • The first $700 of the child’s unearned income is exempt
