The Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) are custodial tax-advantaged ways to save for a child’s college education. Some states permit UGMA accounts while others permit UTMA accounts, but for FINRA/NASAA exam purposes their features are substantially the same.photo-003

UGMA and UTMA accounts are established for exactly one beneficiary (the minor) and will have exactly one custodian (often a parent, but any competent adult can serve as custodian). The custodian owes a fiduciary duty to the minor, and must manage the minor’s assets prudently.

Assets contributed to an UGMA/UTMA account considered an “irrevocable” gift, meaning that money or assets contributed to the account belong to the minor and cannot be taken back. As such, the beneficiary (minor) owns the assets in the account, and at the age of majority (which varies state by state) all money and assets are released to the beneficiary’s control and can be used in any way the beneficiary chooses.

UGMA/UTMA accounts are not tax deferred, but as of 2013, do carry limited tax benefits:

  • The first $1,000 of earned income from investments in a UGMA/UTMA is generally tax-exempt
  • Subsequent income up to $1,000 is generally taxed at the child’s rate
  •  Income earned over $2,000 is generally taxed at the parent’s rate
    (NOTE: the parents’ tax rate applies even if the custodian is not the minor’s parent)

Knopman Notes:
Registered representatives must be are aware of the various tax-advantaged ways families can help save for a child’s future – and UGMA/UTMA accounts, along with Coverdell’s and 529 plans – are an important part of such planning. One feature that cannot be overlooked, however, is the custodian’s duty to prudently manage the assets for the minor’s benefit – speculative and risky investments should generally be avoided.

Exams:
Series 7, Series 24, Series 65, Series 66,

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Written by Dave Meshkov
Dave's mission (and job: Managing Director of Course Design) is to make FINRA exam training engaging, approachable, and dare he even say, enjoyable. Having trained and coached over ten thousand students to exam success he knows how to present complex subjects in memorable and understandable ways. Prior to joining Knopman Marks in 2011, Dave practiced bankruptcy law at Weil, Gotshal & Manages and served as a law clerk in a the Southern District of New York Bankruptcy Court working on the General Motors and Lehman Brothers bankruptcies. Building on his legal expertise and training allows him to keep all our courses updated with the latest legislative and rule-making changes. Dave currently trains for the Securities Industry Essentials (SIE) exam and the Top-Off Series 6, 7, 24, 57, 63, 65, 66, 79, 86, 87, and 99 exams. He also delivers executive one-on-one training and shares his passion for learning outside of work as a ski instructor and yoga teacher. Dave graduated magna cum laude from Fordham Law School, and cum laude with a BA from the University of Pennsylvania.