New York - A UGMA or ("Uniform Gifts to Minor Account") is available in all states under various statutes or through the Uniform Transfers to Minors Act. The main benefits of the account are as follows:
- The gifts are tax-free to donors; hence, they can lower your overall estate and perhaps inheritance taxes
- UGMA accounts can reduce a parents' overall tax rates. When a child or recipient reaches age 14, the earnings are usually taxed at their tax rate - which is usually lower than the parents.
The following is a summary of the key UGMA drawbacks:
- The Uniform Gift to Minors Act specifically provides that once money is transferred to the account, the donor can not take it back.
- Once the child reaches a maximum age (set by each state), only the child can make withdrawals. Until that time, the account, must have a custodian, which is usually the parent.
- If you set up a UGMA and you are also the custodian, an you die before the funds are turned over to the beneficiary, the account will be taxed as part of your estate.
- Any withdrawals or distributions must benefit the child. These distributions generally include college expenditures, summer camp or other activities that solely benefit the child. Technically, if a custodian uses money that is not for the benefit of the child, the child could sue to recover for misappropriation of their UGMA.
Those eligible for financial aid may actually not benefit from a establishing a UGMA. Colleges and financial scholarships generally assume that 35% of assets in a child's name be used to pay tuition before calculating any award of financial need. This figure is approximately 6% of assets for parents' assets. Hence, any tax savings could be significantly offset by the loss of financial aid given by the school.
To combat this financial aid conflict, many parents sent up UGMA accounts and then plan on using the assets for the benefit of the child prior to completing financial aid forms; hence, they receive the tax benefit and avoid losing financial aid.
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