Unit 5.3: UGMA and UTMA

Representatives must know the following rules of custodial accounts

1. An account may have only ONE custodian and ONE minor/beneficial owner 2. Only an individual can be a custodian for a minor's account 3. A minor can be the beneficiary of MORE THE ONE ACCOUNT, and a person may serve as a CUSTODIAN FOR MORE THAN ONE ACCOUNT, as long as each account benefits ONLY ONE minor. 4. The donor of securities can act as custodian or can appoint someone else 5. Parents have no legal control over a custodial account or the securities, UNLESS they are the custodian.

What does the custodian have control over?

1. Buy or sell securities 2. Exercise rights or warrants 3. Liquidate, trade or hold securities

Opening a Custodial Account

1. Custodian's name 2. Minor's name 3. SSN of minor 4. State (PA) where account was registered

In which ways can a custodian use the account?

1. Minor's support 2. Education 3. Maintenance 4. General use 5. Benefit NOT used for expenses associated with raising a child as the parents can incur negative tax consequences.

Custodian

Any securities given to a minor through an UGMA or UTMA account are managed by a custodian, until the minor reaches the age of maturity.

Donating Securities

Donor: When a person makes a gift of securities to a minor under the UGMA or UTMA laws

Death of a Minor

If the beneficiary of a custodial account dies, the securities in the account pass to the minor's estate, NOT to the parent's or custodian's estate.

Death of the Custodian

In the event of the custodian's death or resignation, either a court of law or the donor must appoint a new custodian.

Fiduciary Responsibility

Limitations: 1. Custodial accounts may be opened and managed as CASH ACCOUNTS ONLY. 2. A custodian may NOT purchase securities in an account on MARGIN OR PLEDGE THEM AS COLLATERAL FOR A LOAN. 3. A custodian must reinvest all cash proceeds, dividends, and interest within a reasonable time. 4. Investment decisions must take into account a MINOR'S AGE AND CUSTODIAL RELATIONSHIP. High risk securities are NOT appropriate. Options may NOT be bought in a custodial account. 5. Stock subscription rights or warrants must be either exercised or sold if they have value. 6. Custodian CANNOT delegate away fiduciary responsibilities but can grant trading authority and investment decisions to a qualified third party. 7. A custodian may loan money to an account BUT CANNOT BORROW FROM IT.

Taxation

Minor's SSN appears on a custodial account, and the minor must file an annual income tax return, and PAY TAXES on any investment income produced by the account at the PARENT'S TAX RATE until the minor reaches the age of 18. At 18, the account will be taxed at the minor's tax rate. In the case of full time students, age 24. Although it's the minor account, in most states, the parents are responsible to ensure the taxes are paid.

Registration of Custodial Securities

Registered in the custodian's NAME for the benefit of the minor. CANNOT be registered in street name. Joan Smith as custodian for Brenda Smith.

UGMA and UTMA

Require an adult to act as custodian for a minor (the beneficial owner). Any security or cash may be given to the account without limitation.

UTMA

The custodian can withhold transfer of property in the account until the new adult reaches age 25, 21 in some states.

Indefeasible Title

The donor may NOT take back the gift, NOR may the minor RETURN the gift.

UGMA

When the minor reaches the age of majority, the property in the account is transferred into the name of the new adult.