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What Can UGMA Funds
In most states across the U.S., minors are not allowed to have contracts. As a result they cannot own stocks, bonds, mutual funds, annuities and life insurance policies. Parents too cannot transfer assets to minors. However, the good news is that assets can be transferred to a trust and the most popular trust fund for a minor is the UGMA account or Uniform Gift to Minors Act account. Here the child is named the beneficiary while the parent or the guardian is the custodian of the account. |
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In the U.S. an UGMA account is seen as a poor man’s trust fund. A UGMA account allows a child to have his own investments which grow faster than any other investment like savings bonds. Though the money is in the name of the child, the custodian has control over the investments.
The income from a UGMA account has to be reported on the child’s tax return and is taxed according to the child’s rate as per the Kiddie Tax Rule. A parent is responsible for filing income tax returns for the child and no special tax treatment is accorded to a UGMA account. A child of 14 and above has to sign his own tax returns.
The money from a UGMA account can be used for many things. Neither the donor of the money nor the custodian of the account can restrict the way the UGMA funds are used when the child becomes an adult. The child can use the money for anything without seeking permission from the custodian and though the money is seen as a college trust fund, there is no guarantee that the child would use it for education.
When it comes to seeking financial aid in a college, UGMA funds are considered as assets of the student and can have an impact on the eligibility criteria for college financial aid.
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