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UGMA/UTMA

Grandma, Here's a Great Gift Idea for the Kids



If you're stuck for ideas about what to give the grand kids---or any other minors you're fond of---consider setting up a Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors (UTMA) account. Then, fund it with shares of a mutual fund.

UGMA/UTMA accounts are basically irrevocable trusts that allow minors to own securities and other assets. The primary difference between the two is in UTMA accounts a broader range of securities---like art or real estate---can be held. As for which type to choose, the state you live in dictates that.

Opening an UGMA/UTMA account is simple and can be done quickly provided you've got the Social Security number of the minor. Without it, accounts can't be opened because it's the minor's Social Security number that is the taxpayer ID on it.

Once you've got that number, UGMA/UTMA account forms are available from you're broker, financial planner, the fund family that you'd like to invest, and in many cases, even on-line.

The adult opening the account is its custodian. That means, although it's the minor who owns the assets in the account, it's up to the custodian to manage those assets prudently until the child reaches the age of majority. That's typically age 18 or 21 depending upon the state in which you live.

You can fund UGMA/UTMA accounts by transferring shares from one of your existing mutual fund accounts into this one. Or, purchasing shares of fund specifically for that account. Minimum investment requirements vary from fund family to fund family but can be as low as $25 a month, provided you participate in the fund family's automatic reinvestment program. (Automatic reinvestment programs require that you invest the same amount of money each and every month into the account until the amount invested equals the fund's minimum investment requirement.) Or, can range from a few hundred dollars to a few thousand.

At John Hancock Funds, for instance, accounts can be opened for as little as $25 a month via an automatic reinvestment program, or, with a one-time lump-sum initial minimum investment of $1000. At Fidelity funds, there are no automatic reinvestment programs available on UGMA/UTMA accounts so the minimum initial investment amount required is $2500.

There are lots of benefits to opening a UGMA/UTMA account for a minor. First, unlike 529 plans in which monies invested are ear-marked for education purposes, monies in these accounts can be used for any purpose once the child reaches the age of majority. Second, depending upon the child's age, they can be a good way to help build a nest egg. And third, a great way to teach kids about long-term investing.

Regarding the tax consequences, again, because it's the child who owns the assets in the account, if the child is under age 14, the first $750 of unearned income in an UGMA/UTMA is tax free; the next $750, taxed at the child's rate; and above $1500, taxed at the parent's rate. For kids over age 14, all dividends, income and unearned income over $750 is taxed at the child's rate.

Now that you know the particulars, why not go shopping. After all, 'tis the season.

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Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.


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