Uniform Gift to Minors Act (UGMA): Varies depending on the state Cash Securities Stocks Bonds

1. UGMA vs. UTMA • Uniform Gift to Minors Act (UGMA): Varies depending on the state • Cash • Securities • Stocks • Bonds • Evidence of indebtedness • Certificates of interest or participation in oil, gas, or mining title or lease • Certain life or endowment insurance policies • Annuity contract

2. UGMA vs. UTMA • Unified Transfer to Minors Act (UTMA) • Gifts of any kind of property, real or personal, tangible or intangible • Most states Mot • Both UGMA and UTMA • Minor immediately acquires both legal and equitable title to the gift held by the custodian • Custodian may be donor, another adult, or a trust company • Subject to “kiddie tax” rules

3. When Are These Accounts Used? • Person would like to give money or property for minor’s benefit without giving it outright or incurring the expense of drafting a trust • To shift income tax burden from donor’s higher bracket to minor child’s lower bracket • To utilize the gift tax annual exclusion ($13,000 in 2011)

4. When Are These Accounts Used? (cont’d) • Parent wants to reduce potential estate taxes by shifting future appreciation of an asset to the minor • Where donor does not object to minor receiving the property outright upon reaching statutory age of majority (usually 18 or 21)

5. Requirements • Property must be transferred to a custodian who holds the property for the minor under the relevant state’s Gifts or Transfers to Minors Act • Account must be established for each individual child • Custodial gifts are irrevocable • Property must be distributed to minor when they reach statutory age of majority

6. How Is It Done? • Example: Tony Arcangelo transfers his 10 shares of IBM stock to Mrs. Arcangelo as custodian for their son, Fred. • The stock is registered as follows: “Ginny Arcangelo as custodian for Fred Arcangelo under the Pennsylvania Uniform Transfers to Minors Act” • This is a gift of a present interest and qualifies for the annual exclusion • The value of the stock, its future appreciation, and future dividends are all out of Tony’s estate • All dividend and capital gain income will be taxed to Fred

7. Kiddie Tax Rules • First $950 (in 2011) of unearned income is offset by the child’s standard deduction  No tax • The next $950 (in 2011) of unearned income is taxed to the child at the child’s tax rate • Treatment of unearned income over $1,900 (in 2011) depends on child’s age

8. Tax Implications • Income taxed to minor whether distributed or not, unless used to discharge legal obligation of another person • If income used to discharge legal obligation then taxed to that person • Qualifies as a gift of a present interest for gift tax annual exclusion

9. Tax Implications • If donor is custodian at donor’s death, value of property transferred will be included in donor’s estate • Generally, value of property transferred to UGMA or UTMA will be included in minor-donee’s estate if they die • State gift tax consequences need to be considered

10. Must The Custodian Under A UGMA File An Income Tax Return? • No fiduciary return is required by the custodian • Usually the return is filed on behalf of the minor by the minor’s parents or guardian • Remember to check state filing requirements

11. Issues In Community Property States • Where community property is the subject of the gift to a custodial account then each spouse is considered to be the donor as to ½ the value • In community property states, a brother or sister of one of the parents can be a good choice for custodian

12. What Use May Be Made of Custodial Property? • Under a UGMA the custodian may use the property for: • Support • Maintenance • Education • Benefit of minor to extent custodian in custodian’s discretion deems suitable and proper • Under UTMA, custodial property may be expended for the use and benefit of the minor (much more expansive use than the UGMA)

13. Who Receives Custodial Property If a Minor Dies? • Custodial property passes to the administrator of the minor’s estate usually to be distributed under the state laws of intestacy • Note: This point is often overlooked in cases of divorce where a child may own the closely-held stock or real estate interests from one parent in an UTMA, and then by laws of intestacy a portion of this property transfers to the other parent (the ex-spouse)

14. If A Custodian Dies, How Is A Successor Appointed? • If the minor is legally an adult, there is no need to appoint a successor custodian • If the minor is not legally an adult, then • If the custodian has designated a successor, the designee becomes custodian • If no designated successor, then an adult member of the minor’s family, the minor’s guardian, or a trust company will be appointed • If there is no guardian and the minor is at least 14, then the minor may choose the successor