Uniform Gift to Minors Act (UGMA)

Lesson

The Uniform Gift to Minors Act (UGMA) is a law that allows minors to own securities, such as stocks, bonds, and mutual funds, without the need for a formal trust. Under UGMA, an adult custodian manages the account on behalf of the minor until they reach the age of majority, typically 18 or 21, depending on the state. UGMA accounts are often used to save for a child's education or other future expenses.

Practice Question #1

Which of the following is NOT a type of security that can be held in a UGMA account?

A) Stocks

B) Bonds

C) Mutual funds

D) Real estate

Select an option above to see an explanation here.

A) Stocks are a type of security that can be held in a UGMA account. B) Bonds are a type of security that can be held in a UGMA account. C) Mutual funds are a type of security that can be held in a UGMA account. D) Real estate is not a type of security and cannot be held in a UGMA account.

Terms

UGMA:: Uniform Gift to Minors Act, a law that allows minors to own securities without a formal trust.
Custodian:: An adult who manages the UGMA account on behalf of the minor.
Age of majority:: The age at which a minor becomes a legal adult, typically 18 or 21.
Donor:: The person who establishes a trust or UGMA account for the benefit of another.
Irrevocable:: Cannot be changed or revoked.
Gift tax:: A tax on property transfer from one person to another.
Education savings:: A common use for UGMA accounts is to save for a child's future education expenses.

Practice Question #2

Who is responsible for managing a UGMA account on behalf of the minor?

A) Trustee

B) Donor

C) Beneficiary

D) Custodian

Select an option above to see an explanation here.

A) A trustee manages a trust, not a UGMA account. B) The donor establishes the UGMA account but does not manage it. C) The beneficiary is the minor who benefits from the account but does not manage it. D) The custodian is responsible for managing the UGMA account on behalf of the minor.

Do Not Confuse With

UTMA:: Uniform Transfers to Minors Act, a similar law that allows minors to own additional types of property, such as real estate and fine art, and has a different age of majority (18 to 25, depending on the state)

Practice Question #3

At what age does a minor typically gain control of their UGMA account?

A) 16

B) 18

C) 21

D) 25

Select an option above to see an explanation here.

A) 16 is typically too young for a minor to gain control of their UGMA account. B) 18 is the age of majority in some states, at which the minor gains control of their UGMA account. C) 21 is the age of majority in other states, at which the minor gains control of their UGMA account. D) 25 is not a typical age for a minor to gain control of their UGMA account.

Historical Example

In the 1950s, the UGMA was created to simplify transferring securities to minors. Before the UGMA, transferring securities to a minor required the creation of a formal trust, which was often expensive and time-consuming. The UGMA made it easier for parents and grandparents to save for a child's future by allowing them to transfer securities directly to the child without needing a trust.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

A grandparent wants to help save for their grandchild's college education. They decide to open a UGMA account and transfer shares of a mutual fund to the account. The grandparent serves as the custodian of the account, managing the investments on behalf of the grandchild until they reach the age of majority.