FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsMedium
A client wants to open an account for their 10-year-old child and maintain control over the assets until the child reaches adulthood. They also want to ensure that the assets eventually pass to the child. Which type of account would be MOST appropriate?
- AA testamentary trust account
- BA Uniform Gifts to Minors Act (UGMA) account
- CAn individual brokerage account in the child's name
- DA joint tenants with rights of survivorship (JTWROS) account
Show answer & explanationAnswer & explanation
Correct answer: B. A Uniform Gifts to Minors Act (UGMA) account
A UGMA (or UTMA) account allows an adult custodian to manage assets for a minor until they reach the age of majority, at which point the assets irrevocably transfer to the child. This meets the client's desire for control and eventual transfer.
Why the other options are wrong
- A. A testamentary trust is created through a will and only becomes effective upon the grantor's death, which doesn't fit the immediate need to open an account for a living minor.
- C. A minor cannot legally open an individual brokerage account in their own name due to contractual incapacity.
- D. JTWROS accounts are for two or more adults, not for an adult and a minor with the intent of transferring to the minor at maturity.
UGMA/UTMA Accounts
UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts allow adults to gift assets to minors without needing to establish a trust. A custodian manages the assets until the minor reaches the age of majority, at which point they gain full control.
- Assets are irrevocably the property of the minor.
- Custodian manages the account until minor reaches age of majority.
- Taxed at the minor's tax rate (kiddie tax rules apply).
- UGMA covers securities, cash; UTMA covers broader assets (real estate, fine art).
- Minor gains full control at age of majority (18 or 21, depending on state).
Memory trick: Minor accounts: UGMA/UTMA for Gifting, Guardian for Control, and eventual Adult Ownership.