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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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