Chapter 10.3

Question 1

Donor on UGMA/UTMA

Answer 1

The donor is permitted to designated himself as custodian. The following apply to the donor:

• May give any kind of securities or cash
• Any amount may be given
• Must give fully paid securities
• Must be an adult
• The donor, when making a gift should consider:
  
  • Completion of the transaction occurs when the securities are registered in the name of the custodian for the benefit of the minor.
  • The exact age of the person to whom the gift is made
  • A gift is completely irrevocable
  • That certain states permit gifts of life insurance policies and annuity contracts
• The donor cannot make a gift through his last will and testament
• The donor does not pay capital gains taxes on the donated securities

Question 2

Custodian Account

Answer 2

The following apply to the custodian account:

• Only new gifts are permitted. Property that is already owned by the minor may not be considered a gift to the minor.
• Stock certificates must be registered in name of the custodian, not as trustee or guardian.
• The registration of the securities complete the gift
• Securities may not be purchased on margin
• Cash proceeds from sales or dividends may be held in the custodian account for a reasonable period
• Minor’s SSN must be provided to the transfer agent - not the donor’s or custodians
• The unearned income over $2,000 for a child under 14 will be taxed to the child at the rate at which it would be taxed if it were added to the parents taxable income

Question 3

The Custodian

Answer 3

The following apply to the custodian of the account:

• One custodian and one minor per account - joint custodians are not permitted
• All custodial property must be turned over to the minor when the minor reaches age of majority. Legal title is vested in the minor and cannot be revoked
• The custodian is empowered to collect, hold, manage, invest, and reinvest custodial property as he deems advisable
• The custodian may, at his discretion, use custodial property for the support, maintenance, education, and general use and benefit of minor
• The custodian is usually permitted to receive compensation for reasonable services and reimbursement for necessary expenses
• A custodian is no permitted to “assign” the account to anyone else, such as an investment advisor or trustee

Question 4

Handling the custodial Account

Answer 4

The custodian retains control over the minor’s account until either:

• The minor attains majority, in which case the cash and securities remaining will be distributed to the individual or
• The custodian is removed by a court order
• If the custodian dies, a successor custodian will be appointed. If a minor dies, the remaining proceeds will be payable to the minor’s estate.
• If an Uncle establishes an UGMA account for his nephew and names himself as custodian, then the uncle is the only person who can manage the account. The child’s legal guardians(parents) cannot enter orders in the account.
• Checks can never be drawn on the account in the custodian’s own name.
• If the stock certificate is signed by the minor, the certificate is not in negotiable form.
• Futures contracts cannot be purchased in a UGMA account.