Uniform Gift to Minors Account(UGMA) is a poor man’s trust fund. A parent invests in a custodial account for a child's future. The purpose of UGMA is to provide children under the age of eighteen with a way to own investments. The money is in the minor's name. However, the custodian has the responsibility to handle the money in a prudent manner for the minor's benefit. Usually, parents act as a custodian. The parent is not entitled to withdraw the money for his/ her own needs.
The main advantage of a UGMA is the tax savings. The first $700 of investment income is tax-free for the child and the next $700 is taxed at 15%. Before the kid is age 14, any investment income beyond $1,400 is taxed at the parents' rate. From 14 on, the income tax is at the child's rate, usually 15%. Moreover, anyone, from the grandparents to the godparents, can establish a UGMA. In a UGMA, there is no limit on the amount invested.