The Uniform Gift to Minors Act (UGMA) is a law in force in many jurisdictions that allows minors to own securities and other assets through custodians without any special trust for the purpose. Needless to state that special trust is an expensive proposition that can be avoided by virtue of the aforesaid arrangement under the provisions of the UGMA. In some states or jurisdictions the Uniform Transfers to Minors Act (UTMA) is in place that achieves similar objectives. UGMA accounts or UTMA accounts are much faster, cheaper and simpler than a trust.
When donating assets to a minor invoking the provisions of the UGMA/ UTMA, the donor must appoint a custodian for functioning as trustee. An UGMA trust or an UTMA trust is an arrangement where the terms and conditions of such trust are set in these statutes as adopted by the concerned state or jurisdiction instead of being left to be drawn up in the trust deed. In the event of failure of a custodian to comply with these terms, he would expose himself to sanctions and liabilities.
.The UGMA/UTMA are useful devices that allow a minor to own securities and assets through custodian, which he otherwise could not have done due to lack of his right to contract without the expensive proposition of a special trust. The custodian has a duty to handle the securities and the funds in a prudent manner without opting for high risk parking zones.
Once the minor reaches adulthood at 18 or 21 years of age depending on the concerned state or jurisdiction, he is free to use or dispose off the assets as he chooses without any clearance of the custodian.
In as much as the concerned minor is the owner of the securities and assets placed in an UGMA/UTMA account, gifts donated to a minor into such mode only up to the annual gift tax exclusion limit has no gift tax consequences for the donor. This is the mandate of the Internal Revenue Service.
However, a minorís chances of receiving financial aid can be seriously affected, if he owns an UGMA/UTMA account.