UGMA and UTMA accounts are accounts in which a custodian holds assets for a minor. An UGMA account is one under the Uniform Gift to Minors Act. An UTMA account is one under the Uniform Transfers to Minors Act.
UGMA accounts must end when the minor reaches age 18 (or other age in the state statute), at which time the assets must be distributed outright to the (now former) minor. UGMA accounts are somewhat more limited in the assets they can accept and hold. UTMA accounts came on the scene later and can accept and hold a wider range of assets, including real estate. Like with UGMA accounts, assets in an UTMA account must be distributed to the (now former) minor at the age in state statute, typically age 21.
With both of these accounts, the donor transfers assets to the custodian of the account for the benefit of the minor beneficiary. Prior to the termination of the account, the custodian manages the account and uses it exclusively for the benefit of the minor. Upon the termination of the account, the custodian must turn the assets over to the beneficiary who is no longer a minor. It doesn’t matter if the custodian thinks the beneficiary isn’t mature enough to handle the assets. Once the beneficiary reaches the age in the statute, the assets must be distributed to the beneficiary.
Gifts to the account are completed gifts for gift tax purposes and qualify for the gift tax annual exclusion (currently $15,000). However, if the parent is the custodian, the assets would be included in the parent’s taxable estate in the event the parent dies while the beneficiary is still a minor.
Originally, UGMA/UTMA accounts were enacted as a way to hold assets in the name of a minor without the need for a guardianship. Also, there were income tax advantages to transferring assets to such accounts. With the advent of the kiddie tax, the income tax advantages are minimal.
While UGMA/UTMA accounts may be a reasonable way to manage small amounts of funds for a minor, typically there are better ways to proceed. A 529 plan may be the best way to proceed if the funds will be used for the education of the beneficiary. An ABLE account may be the best way to proceed if the beneficiary has special needs.