Uniform Gifts/Transfers to Minors (UGMA/UTMA): Rules, Custodianship, and Taxes
An uncle opens a Uniform Transfers to Minors Act (UTMA) account for his 12-year-old niece and names himself as the sole custodian. Which of the following statements regarding the operation and legal ownership of this account is TRUE?
UTMA/UGMA gifts are irrevocable; the minor is the sole owner and tax reporting uses the minor's SSN. Margin trading is strictly prohibited.
Complete Analysis & Legal Rationale
In UGMA/UTMA custodial accounts: (1) Gifts and transfers are irrevocable and indefeasibly vest in the minor child; (2) The minor is the beneficial owner, and all tax reporting is filed under the minor's Social Security number; (3) Only one custodian and one minor are permitted per account; (4) The custodian must manage assets for the minor's benefit (never for personal use or legal parental support duties); and (5) Custodial accounts must be cash accounts (margin and short sales are prohibited).
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
A custodian can never use custodial assets for personal expenses or parental legal support obligations.
The minor is the absolute beneficial owner and tax reporting uses the child's SSN.
Custodial accounts must be cash accounts; margin borrowing and speculative naked options are strictly barred.
Transfers into UGMA/UTMA accounts are completely irrevocable immediately upon deposit.
Official Standard: Establishes irrevocable vesting, minor tax reporting, single-custodian structure, and prohibition on margin.