UGMA/UTMA accounts – tax aspects in Germany

UGMA and UTMA accounts – in our opinion – are great ways of transferring assets to the next generation without really rendering control over them, making sure any benefiting minor will have a chance to get used to owning the asset over an extended period of time, rather than getting it all at once! For this reason, it is worth looking at what can happen from a German perspective when living overseas to make sure the tax consequences align to the maximum extent.

The acronyms hail from the state laws that put these accounts in place — the Uniform Transfer to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA).

UGMA came first and is valid in all 50 U.S. states. It allows gifts of cash or securities to be given to minors without tax implications up to gift tax limits. UTMA was established later and expanded gifts to include property and other transfers for those states that have adopted it.

Although the custodian of these accounts invests and manages the account, only the minor can use or benefit from it — the account and assets within are irrevocable and considered property of the minor. This means that the minor is also responsible for paying taxes on any investment income earned.

When contributing to and benefiting from a UGMA or UTMA account German tax consequences hence pertain mostly to two areas.

The first being German gift tax. Depending on nature, size, site and tax value of the asset put into a UGMA/UTMA account, as well as the relationship between donor and beneficiary, German gift tax might be levied.

The second being German income tax. Obviously stock, cash or real property dedicated to a UGMA/UTMA account should grow over time and yield returns along the way. While under US law the income tax consequences depend mostly on whether the minor’s income is from earned or unearned income, this distinction does not apply under German law.

Under German law it is the beneficial owner who bears the tax consequence. Beneficial owner essentially is the person, who can preclude economic influence on the asset for the underlying asset’s usual life span. Since a minor has no influence on the administration of the UGMA/UTMA accounts it is the custodian who will need to report this income under German tax law.

Please let the taxperts know if you are owning or considering UGMA/UTMA accounts and we are happy to discuss the tax aspects with you.

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