UGMA UTMA

UGMA stands for Uniform Gift for Minors.

UTMA stands for Uniform Transfers to Minors.

What are the tax consequences of setting up a custodial account?

The assets of an UGMA / UTMA account are the minor's property outright. Any gifts made to an UGMA / UTMA account are irrevocable and the donor relinquishes all rights to the property.

Although a designated custodian manages the property while the minor is under the applicable age of majority, legal title to the assets belongs to the minor. As soon as the minor reaches the designated distribution age, at which the UGMA or UTMA specifies that custodianship terminate, the assets in the custodial account must be distributed or transferred to an account in the single name of the minor.

There is no limit on the maximum contribution that may be made to a custodial account. To the extent a donor contributes more than $11,000 ($22,000 for a married couple, each giving $11,000) to a custodial account in any one year the donor is required to file a gift tax return even if no gift tax is due.

Since the child is the owner of the assets in the custodial account, all the income tax consequences belong to the child. How the income generated in the custodial account will be taxed and reported to the IRS depends upon the age of the child and the child's other sources of income.