When is a Trust not a Trust?…..when it is a Custodial Account

As a way to gift assets to minor children, the most common arrangement is via either Uniform Gifts To Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) custodial account. UGMAs or UTMAs are actually a series of laws which are different in each state. They function similarly to a trust, in that assets are held for the benefit of a minor child, yet there is much less cost and work involved in setting one up.

Who can set up a UGMA or UTMA Account? Any adult person including, parents, grandchildren, or bank trust department, can act as custodian of an account.

How does it work? The account provides that the designated person acts as the custodian for the minor child's assets. These assets remain in the account until the minor reaches the age of majority, as specified by their particular state. The UTMA is similar to the UGMA, but it permits investments in real estate and other assets.

When the donor makes the gift to the custodian account, the gift is irrevocable. The donor gives up all rights to the property, and can't take back the property. The minor cannot return the gift until he reaches the age of majority. Once he does reach the age, he is no longer a minor, and the property can then be transferred into his name.

What can you purchase in these accounts? Any kind of security, actually, including cash, life insurance, annuity contracts. And there is no dollar limitation on the amount of the gift.

Gifts to a UGMA/UTMA are assets that can be used for the minor's benefit immediately, and are said to be gifts of a "present interest". Gifts of a "present interest" qualify for the $10,000 annual exclusion. This means that the donor would not have to pay a gift tax on this amount.

What happens if the minor dies? If the minor beneficiary of the UGMA/UTMA account dies, the assets in the account pass to his estate, and not to the parent's or custodian's estate.

What happens if the custodian dies? If the custodian dies or 'resigns', a new custodian must then be appointed by either the courts or the donor.

What are the advantages to a UGMA/UTMA? -Unlike a trust, it costs nothing to set up -It's easy to set one up, simply open a brokerage account or bank account and make a gift, and manage the assets.

What are the disadvantages to a UGMA/UTMA? -The gift is irrevocable-what's done can't be undone.

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