Uniform Gifts to Minors and Uniform Transfer to Minors Acts (UGMA – UTMAs)
Well meaning parents often encourage precocious children to learn about stocks and good money management skills as early as possible. Youngsters, of course, have not yet reached the age of majority required to open brokerage accounts alone. Parents and children together may explore the stock market through Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts.
UGMA – UTMA Terms
UGMA-UTMA accounts are set up beneath the direction of an adult custodian, on behalf of a minor. Although the custodian effectively manages the UGMA-UTMA, the minor always retains ownership rights over assets within the account. Therefore, all withdrawals made from the UGMA-UTMA must be spent for the youngster’s benefit. When the child reaches the age of majority, at either 18 or 21, depending upon state law, the funds will be fully transferred to his control.
Again, UGMA-UTMA account money will ultimately be managed at the discretion of the young adult. In some cases, relatives who helped fund the account may be disappointed if the young adult decides against higher education. For more control over the money, family members can hire an attorney to set up a trust.
Adult custodians execute all transactions within the UGMA-UTMA account. To fund the account, a minor would first hand the money over to the adult custodian, who would then deposit that money into the UGMA-UTMA. For trading, the child will also deliver instructions to the adult custodian, who then places the orders with the brokerage. Minors cannot execute their own trading decisions alone. The adult custodian, however, does not need permission from the minor to trade securities in the UGMA-UTMA.
Dividend reinvestment plans (DRIPs) are ideal for beginning investors, as they often accept minimum investments for as little as $50 per month. DRIP plans bypass brokerage commissions and purchase stock directly from major corporations. To begin, you will visit a corporation’s investor relations link through its official website for DRIP enrollment information.
A youngster may consider buying stock within his favorite corporation. For example, a young child who grew up enjoying Happy Meals may happily put money to work in McDonald’s and Coke DRIPs.
Investing in stock at a young age best allows a person to take advantage of compound returns and avoid financial distress later in life. For example, a $100 monthly investment earning a 10 percent annual return would grow to $226,049, $632,408 and $1,732,439 over 30, 40 and 50 years, respectively. As a benchmark, please be advised further that the Standard and Poor’s 500 Equity Index has averaged 11-percent annual returns since its 1957 inception.
Parents, relatives and friends of the family may also make donations into the UGMA-UTMA at any time to help the child pay for future tuition costs. Capital gains and dividends within the UGMA-UTMA will be taxed at lower rates applicable to the child’s income.