Uniform Transfers to Minors Act (UTMA)

Lesson

The Uniform Transfers to Minors Act (UTMA) is a law that allows minors to receive gifts, such as money, securities, and real estate, without the need for a guardian or trustee to oversee the assets. UTMA accounts are custodial accounts established for the benefit of a minor, with an adult custodian managing the account until the minor reaches the age of majority.

Practice Question #1

Which of the following assets can be transferred to a minor through a UTMA account?

A) Stocks

B) Real estate

C) Cash

D) All of the above

Select an option above to see an explanation here.

A) Stocks can be transferred through a UTMA account. B) Real estate can be transferred through a UTMA account. C) Cash can be transferred through a UTMA account. D) All of the above assets can be transferred through a UTMA account.

Terms

UTMA:: Uniform Transfers to Minors Act, a law allowing minors to receive gifts without a guardian or trustee.
Custodian:: An adult who manages the UTMA account for the benefit of a minor.
Age of majority:: The age at which a minor becomes an adult, typically 18 or 21, depending on the state.
Gift:: An asset, such as money, securities, or real estate, given to a minor through a UTMA account.
Irrevocable:: Once a gift to a UTMA account is made, it cannot be taken back or changed.
Income tax:: Earnings from a UTMA account may be subject to income tax.
Estate tax:: Assets in a UTMA account may be subject to estate tax upon the minor's death.
Fiduciary duty:: The custodian has a legal obligation to act in the minor's best interest.
Termination:: The UTMA account terminates when the minor reaches the age of majority.

Practice Question #2

What is the primary difference between a UTMA account and a UGMA account?

A) The age of majority

B) The types of assets that can be transferred

C) The requirement for a custodian

D) The tax implications

Select an option above to see an explanation here.

A) The age of majority is not the primary difference between UTMA and UGMA accounts. B) The primary difference between UTMA and UGMA accounts is the types of assets that can be transferred. UGMA accounts allow for transferring gifts like cash, stocks, mutual funds, and insurance policies. UTMA accounts, on the other hand, are more versatile. UTMA accounts can also include real estate, paintings, or other pieces of art, royalties, and patents. C) Both UTMA and UGMA accounts require a custodian. D) The tax implications are not the primary difference between UTMA and UGMA accounts.

Do Not Confuse With

UGMA:: Uniform Gift to Minors Act, a law that allows minors to own securities without a formal trust.

Practice Question #3

What is the custodian's main responsibility in a UTMA account?

A) To make investment decisions for the minor

B) To act in the best interest of the minor

C) To ensure the account is tax-free

D) To distribute the assets when the minor reaches the age of majority

Select an option above to see an explanation here.

A) Making investment decisions is part of the custodian's role but not their main responsibility. B) The custodian's main responsibility is to act in the minor's best interest. C) Ensuring the account is tax-free is not the custodian's main responsibility. D) Distributing the assets when the minor reaches the age of majority is part of the custodian's role but not their main responsibility.

Historical Example

In the 1980s, many states adopted the UTMA to replace the older Uniform Gifts to Minors Act (UGMA), which had more limited options for assets that could be transferred to minors. The UTMA expanded the types of assets that could be gifted to minors, making it a more flexible choice for families and financial planners.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

A grandparent wants to give their grandchild a gift of $10,000 in stocks. Instead of setting up a trust or appointing a guardian, they can establish a UTMA account with a custodian to manage the stocks until the grandchild reaches the age of majority.