The Uniform Gifts to Minors Act (UGMA) is an act in some states of the United States that allows assets such as securities, where the donor has given up all possession and control, to be held in the custodian's name for the benefit of the minor without an attorney needing to set up a special trust fund. This allows a minor in the United States to have property set aside for the minor's benefit and may achieve some income tax benefit for the child's parents. Once the child reaches the age of maturity (18 or 21 depending on the state), the assets become the property of the child and the child can use them for any purpose. Contributing money to an UGMA account on another person's behalf could be subject to gift tax however the Internal Revenue Code of the United States allows persons to give up to the annual gift tax exclusion to another person without any gift tax consequences as long as total gifts are below the lifetime limits.
In the majority of states that have adopted the Uniform Transfers To Minors Act (UTMA), the assets are treated similarly. The assets are held in the custodian's name until the child reaches age of majority. States that adopted UTMA also repealed UGMA; UTMA specifically provides that contracts in UTMA states which reference UGMA are governed by UTMA. Thus, UGMA is often still referred to in contracts designed for use in multiple states, even though it may actually mean UTMA in a particular state. Under the UGMA or UTMA, the ownership of the funds works like it does with any other trust and the donor must appoint a custodian (the trustee) to look after the account for the benefit of the beneficiary.
A UGMA or UTMA account allows the assets to be taxed at the minor's income tax bracket. With the increase in the age from 18 to 24 where the kiddie tax is imposed, the tax advantage of a UGMA or UTMA is decreased. For the 2009 tax year, only approximately $1,900 of the child's unearned income can avoid being taxed at the child's parent's tax rate. Minors can also invest in the stock market.