The UGMA and How it Affects Taxes for Minors

When you are dealing with an inheritance or securities donation to your child from a grandparent or other individual, you need to understand how tax laws work.  Minors do not have to pay taxes, of course, but receiving gifts for your child can affect your own taxes.  Let’s look at the Uniform Gifts to Minors Act, or the UGMA.

The UGMA is an act that is recognized in many states that lets a donor put assets into the name of a parent or beneficiary to be held for a minor until they reach the age of maturity.  What makes the UGMA unique is that it does not require the establishment of a trust fund.  Better still, it may even offer tax benefit for the parents in charge of the account.

When an UGMA has been established for your child, you will find that the tax rate on the account is assessed by your child’s income tax bracket, rather than your own.  This can certainly help avoid a great deal of taxes that could be due on the account.  While contributions may be taxed according to the Gift Tax, you will typically find that you can give up to the exclusion on that tax with no penalty.

The UGMA is certainly a very unique act, and it is one that can offer great future benefit to children.  If you are dealing with an inheritance due to your child, this can be an excellent option to your consider.