FINRA Series 7Opens Accounts and Evaluates Customer ProfileEasy
A father opens a Uniform Gifts to Minors Act (UGMA) account for his 10-year-old daughter and deposits $5,000 of stock as custodian. Which statement is TRUE regarding this account?
- AThe account may be established with both the father and mother listed as co-custodians
- BOnce the gift is made, it is irrevocable and the assets must be used for the benefit of the minor
- CIncome earned in the account is reported under the father's Social Security number
- DThe father may withdraw the funds for his own personal use if he later needs them
Show answer & explanationAnswer & explanation
Correct answer: B. Once the gift is made, it is irrevocable and the assets must be used for the benefit of the minor
Gifts made to a UGMA/UTMA account are irrevocable; the custodian holds the assets as a fiduciary and must use them only for the benefit of the minor. Only one custodian and one minor are permitted per account, and income is taxed to the minor (subject to "kiddie tax" rules), not the custodian.
Why the other options are wrong
- A. UGMA/UTMA accounts permit only one custodian per account.
- C. Income is taxed under the minor's Social Security number, not the custodian's.
- D. Custodial gifts are irrevocable; funds cannot revert to the donor for personal use.
UGMA/UTMA Custodial Account
A custodial account holding gifted assets for a minor's benefit, with one custodian per account and one minor per account.
- Gifts are irrevocable
- Only one custodian and one minor per account
- Income taxed to the minor under kiddie tax rules
- Assets transfer to the minor at the age of majority
Memory trick: Once gifted, it's a one-way gift — one custodian, one minor, no take-backs.