What Is The Uniform Gifts To Minors Act (UGMA)?
Each state has a version of the Uniform Gifts To Minors Act (UGMA), which allows you to make gifts to minor children, under the conservatorship of a parent or other designated custodian.
A UGMA account is designated as such in the child's name, and the child's Social Security number is used. The current income reportable from such accounts are taxed to the children. "Kiddie tax" rules apply if the child is under age 14.
In general, amounts put into a UGMA account are considered irrevocable gifts to the children, although they cannot access the funds until they reach the age of majority in their state. The funds may be used by the parent/custodian of the trust for the child's benefit, but not for expenses that the custodian might
otherwise be expected to provide as the child's parent. For example, distributions cannot be made for normal expenses for food, shelter, clothing, school up to grade 12, normal medical expenses, etc. If the child wants, and the custodial agrees, withdrawals may be allowed for non-essential expenses, such as a first car, a special dress for the prom, stereo equipment, and, of course, higher education.
Keep in mind that the child will, at the age of majority, generally have unlimited access to the account and can legally spend the money at will. Also, the presence of such an account might make it more difficult for the child to qualify for educational assistance from government programs.