A more thorough explanation:

The Uniform Gifts to Minors Act (UGMA) is a law that allows money and financial securities to be given to minors through a UGMA account. This can be done without creating a formal trust. The donor or a custodian manages the property for the minor’s benefit until the minor reaches a certain age. Once the child reaches a specified age set by the state, the child will have full control over the property.

For example, a grandparent may want to give their grandchild $10,000 to help pay for college. They can do this by setting up a UGMA account and designating the grandchild as the beneficiary. The grandparent or a custodian will manage the account until the grandchild reaches the age of majority, which is usually 18 or 21 depending on the state. At that point, the grandchild will have full control over the money and can use it for college or any other purpose.

One benefit of UGMA accounts is that gifts to the minor are exempted up to $15,000 a year from Federal taxes. However, any amount beyond this may be subject to taxes. Additionally, UGMA transfers allow the gift to be taxed based on the minor’s tax rate.

One downside of UGMA accounts is that they can reduce or make a minor ineligible for financial aid since the property is owned by the minor. It is important to consider this before setting up a UGMA account.

UGMA accounts are different from Uniform Transfers to Minors Act (UTMA) accounts, which allow more risky assets and tangible assets such as real estate to be transferred to the minor as well.