UGMA/UTMA Accounts: Flexible Custodial Accounts for a Child’s Future

Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are custodial investment accounts designed to help adults transfer financial assets to a minor while maintaining control until the child reaches the age of majority. These accounts are simple, flexible, and can hold a wide range of assets, making them useful for long-term gifting and investment purposes.

💡 What is a UGMA/UTMA Account?

• Custodial accounts that allow an adult (usually a parent or guardian) to manage financial assets for a minor.

• UGMA accounts can hold financial assets such as cash, stocks, and bonds.

• UTMA accounts can include a wider range of assets such as real estate, artwork, and patents in addition to financial assets.

• The child becomes the account owner once they reach the "age of majority" (usually 18 or 21, depending on the state).

📌 Key Features of UGMA/UTMA Accounts

• Ownership: The minor is the legal owner of the assets, but the custodian manages the account until the child reaches legal age.

• Flexibility: Funds can be used for any purpose that benefits the child (not limited to education).

• No contribution limits: There is no annual cap, but gift tax rules apply (over $18,000 per donor in 2024 may be taxable).

• Irrevocable gifts: Once assets are transferred, they belong to the child permanently.

• Investment options: Can invest in stocks, mutual funds, ETFs, and more.

• Tax benefits: Unearned income is taxed at the child’s tax rate up to a threshold (known as the Kiddie Tax rules).

🧾 Pros and Cons of UGMA/UTMA Accounts

✅ Pros:

• Easy to set up and manage

• No restrictions on what the money can be used for

• Helps teach children financial literacy and responsibility

• Can reduce estate tax burden for the donor

❌ Cons:

• Irrevocable — assets cannot be taken back

• May reduce eligibility for financial aid (considered student asset)

• Less tax-advantaged than 529 plans or Coverdell ESAs

• Once the child comes of age, they control the funds — even if they choose to spend it unwisely

📊 UGMA vs UTMA: Key Differences

• Type of Assets Allowed

  • UGMA: Only financial assets (cash, stocks, bonds, mutual funds).

  • UTMA: Financial assets plus physical assets like real estate, vehicles, art, and more.

• Flexibility of Investments

  • UGMA: More limited in what can be held.

  • UTMA: Broader range of allowable assets.

• State Availability

  • UGMA: Available in all 50 states.

  • UTMA: Not available in every state (check your state laws).

• Age of Transfer (Control to Minor)

  • UGMA: Typically 18 or 21, depending on the state.

  • UTMA: May extend up to 25 in some states.

• Use of Funds

  • Both: Funds can be used for any purpose that benefits the child (not restricted to education).

• Legal Structure

  • Both: Irrevocable gifts — once given, assets belong to the child.

• Tax Treatment

  • Both: Subject to the Kiddie Tax (child’s lower tax rate up to certain limits, then taxed at parents' rate).

🧠 Who Should Consider a UGMA or UTMA Account?

• Parents or grandparents looking to gift or invest money for a child's future needs

• Donors who want flexibility in how the funds are used (not limited to education)

• Families who do not need the tax benefits of 529 plans or who want broader investment options

📚 FAQ: UGMA/UTMA Accounts

Q: Can UGMA/UTMA accounts be used for college expenses?
Yes, the funds can be used for tuition, housing, books, and other qualified expenses — but they're not limited to education.

Q: Can I take back the money once I contribute to a UGMA/UTMA?
No. Contributions are irrevocable. Once the assets are transferred, they belong to the child.

Q: Will this affect my child’s financial aid eligibility?
Yes. UGMA/UTMA assets are considered the child’s, which can significantly reduce financial aid eligibility.

Q: Can I transfer the account to another child?
No. UGMA/UTMA accounts are set up for a specific beneficiary and cannot be changed once created.

Q: What happens when the child reaches adulthood?
They gain full control of the account and can use the money as they choose — for college, a car, a trip, or anything else.