College Investment: What Is A Ugma Account?

Information on UGMA accounts aims to help parents and donors select an appropriate fund for presenting children with assets such as stocks, bonds and cash.

A UGMA account, or The Uniform Gift to Minors Act, provides a means of investing money for a student that he or she cannot touch until reaching legal age, either 18 or 21 years, depending on the state. By limiting the children's access to the accounts, the invested money is secure and carefully stored for the moment of need.

UGMA accounts allow individuals to transfer ownership of financial assets to youths within the confines of a custodial account. When the child reaches the designated age of adulthood, 18 for most UGMAs, he or she gains full control of the account. No maximum contribution amount limits the funds that can fill a UGMA.

A trust allows minor-aged children to receive stocks, bonds, life insurance policies, annuities and mutual funds that they may not otherwise own due to lack of a contract. Assets such as stocks, bonds and the others must be transferred to a trust, such as a custodial account, or UGMA, in order for the child to eventually gain possession.

By setting up a UGMA account, investors avoid getting raked over the coals by taxes. The account is set up in the child's name, and all monies put into the account cannot be removed unless by the child once he or she reaches the legal age.

Once the child reaches the age of termination and gains control of the UGMA, he or she can do just about anything with the money. Former custodial parties cannot enforce that the funds be spent or saved in any particular way, as the account becomes the complete property of the child upon maturation.

Disadvantages to the UGMA account:

- No matter what the custodian or investor wants the money to provide or pay for, the child has full discretion once he or she has reached the age of termination for the UGMA. At that point, the custodial relationship is severed and the cash is the beneficiary's to do with as he or she pleases.

- Monies contributed to a UGMA account are irrevocable. The investor cannot change his or her mind once the funds have been deposited.

Benefits and Features of a UGMA account:

- The money can be spent on things other than school tuition. The main condition is that it must be spent according to the beneficiary's wishes once he or she has matured to the legal age.

- The parents, grandparents and adult family members of the child with the account can contribute up to $10,000 each per year without facing federal gift taxation.

- The UGMA account allows set up of a custodial account that can transfer gifts and assets to a minor without the hassles of setting up a trust.

- This is one of the most flexible and most cost-effective means of storing funds for youths who plan to attend college.

- Another type of account, the UTMA, or Uniform Transfer to Minors Act, allows for property such as real estate, fine art and so forth to be presented to minors.

- UGMA accounts do not allow for the investor to select a new beneficiary once funds have been placed into the account.

- UGMAs cost nothing and are actually very easy to set up.

In order to select the best approach to investing for college, potential investors and custodians should investigate all the options available to them and choose the best for their own situation.

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