Subject: Tax Code - Uniform Gifts to Minors Act (UGMA)
[for those wishing to set up an account for their teenager]
Last-Revised: 4 Dec 1994
From: ask@cbnews.cb.att.com, schindler@csa1.lbl.gov, eck@panix.com
The Uniform Gifts to Minors Act allows you to give $10,000 per year to any minor, tax free. You must appoint a custodian.
Some accountants advise that one person should make the gift and that a different person should be the custodian. The reason is that if the donor and custodian are the same person, that person is considered to exercise sufficient control over the assets to warrant inclusion of the UGMA in his/her estate. For more info, see Lober, Louis v. US, 346 US 335 (1953) (53-2 USTC par. 10922); Rev Ruls 57-366, 59-357, 70-348.
All of these are cited in the RIA Federal Tax Coordinator 2d, volume
22A, paragraph R-2619, which says (among other things) "Giving cash,
stocks, bonds, notes, etc., to children through a custodian may result
in the transferred property being included in the donor's gross estate
unless someone other than the donor is named as custodian."
To give such a gift, go to your friendly neighborhood stockbroker,
bank, mutual fund manager, or (close your eyes now: S&L), etc. and
say that you wish to open a Uniform Gifts (in some states "Transfers")
to Minors Act account.
You register it as:
[ Name of Custodian ] as custodian for [ Name of Minor ] under the
Uniform Gifts/Transfers to Minors Act - [ Name of State of Minor's
residence ]
You use the minor's social security number as the taxpayer ID for this
account. When you fill out the W-9 form for this account, it will show this form. The custodian should certify the W-9 form.
The money now belongs to the minor and the custodian has a legal
fiduciary responsibility to handle the money in a prudent manner for
the benefit of the minor.
So you can buy common stocks but cannot write naked options. You
cannot "invest" the money on the horses, planning to donate the
winnings to the minor. And when the minor reaches age of majority -
usually 18 - the minor can claim all of the funds even if that's
against your wishes. You cannot place any conditions on those funds
once the minor becomes an adult.
Until the minor reaches 14, the first $600 earned by the minor is tax free, the next $600 is taxed at the minor's rate, and the rest is taxed at the higher of the minor's or the parent's rate. After the minor reaches 14, all earnings over $600 are taxed at the minor's rate.
Note that if you want to continue doing your childs taxes even after
they turn 18, there is no reason they need to know about their UGMA
account that you set up for them. They certainly can't blow their
college fund on a Trans Am if they don't know about it. However,
note that at least one state (NY) allows the donor to establish a
"turnover" age of 21 by making an express statement to that effect
when the account is created. See New York Estates, Powers & Trusts
Law sec. 7.4-11 ("Age twenty-one election").
Even if your child does his/her own taxes, you can still give them
gifts through a trust without them knowing about it until they are
more mature. Call and ask Twentieth Century Investors for information
about their GiftTrust fund. The fund is entirely composed of trusts
like this. The trust pays its own taxes.
cswww.essex.ac.uk
- Jeff
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