Legal Definitions - UGMA

The Uniform Gifts to Minors Act (UGMA) was a law enacted in many U.S. states that provided a simple and inexpensive way for adults to give financial gifts to minors without the need for a formal trust. Under UGMA, an adult (the donor) could transfer assets like money, stocks, or bonds to a minor, but these assets would be managed by a designated adult (the custodian) until the minor reached the age of majority (typically 18 or 21, depending on state law). While the minor legally owned the assets, the custodian had the authority to manage, invest, and spend the funds for the minor's benefit. UGMA has largely been superseded by the Uniform Transfers to Minors Act (UTMA), which allows for a broader range of assets to be transferred.

• Imagine a grandmother who wants to start a college fund for her five-year-old grandson. Instead of setting up a complex legal trust, she could open an UGMA account at a bank or brokerage firm, depositing money into it and naming herself as the custodian. The money legally belongs to her grandson, but she manages the investments and withdrawals until he turns 18 or 21, at which point he gains full control of the account. This demonstrates how UGMA simplifies the process of gifting cash for a specific future purpose to a minor.

• Consider a parent who wishes to give their 12-year-old daughter shares of a publicly traded company to teach her about investing and provide a long-term asset. The parent could transfer these stock shares into an UGMA account, designating themselves as the custodian. While the daughter is the legal owner of the stock, the parent, as custodian, retains the authority to buy, sell, or manage the portfolio until the daughter reaches the age of majority. This illustrates UGMA's use for gifting securities and the custodian's role in managing the assets.

• An aunt wants to give her 10-year-old nephew a significant savings bond that will mature when he is older. Rather than simply holding the bond herself, she could purchase it and title it under an UGMA account for her nephew, naming his father as the custodian. This ensures the bond is legally the nephew's property from the start, but his father will manage it and ensure it's properly handled until the nephew is old enough to manage his own finances. This example shows how UGMA facilitates gifting other types of financial instruments and allows for a third-party custodian.