What UGMA and UTMA Accounts Are

A UGMA account (Uniform Gifts to Minors Act) and a UTMA account (Uniform Transfers to Minors Act) are custodial accounts that let an adult hold money or investments in a child's name. The adult—usually a parent, grandparent, or other relative—manages the account until the child reaches the age of majority, which is typically 18 or 21 depending on your state and which account type you use.

The key difference: UGMA accounts hold only cash, stocks, bonds, and mutual funds. UTMA accounts can hold those things plus real estate, artwork, patents, and other property. Both accounts are irrevocable—once you put money in, it belongs to the child legally, even though an adult controls it until they come of age.

These accounts are not the same as a 529 education savings plan or a Coverdell ESA. Those are tax-advantaged accounts built specifically for education costs. UGMA and UTMA accounts have no restrictions on how the money is used once the child takes control.

Key Takeaways

  • UGMA accounts hold cash and securities; UTMA accounts can also hold real estate and other property.
  • An adult custodian manages the account and can spend the money on the child's needs, but the money legally belongs to the child from day one.
  • When the child reaches the age of majority (18 or 21, depending on your state), they take full control with no restrictions on how they use it.
  • Money in these accounts counts against financial aid calculations, which can reduce the amount of aid a student receives.
  • The child pays taxes on earnings above a certain threshold, and the tax rate depends on the child's age and income level.

How Custodianship Works

When you open a UGMA or UTMA account, you name yourself (or another adult) as the custodian. The custodian has a legal duty to manage the money for the child's benefit and can spend it on things the child needs—food, medical care, education, housing. The custodian cannot spend it on themselves or use it for personal expenses.

The child's name and Social Security number go on the account, but the child does not make decisions about the money while they are a minor. The custodian decides when and how to invest it, whether to move it to a different investment, and when to withdraw it for the child's needs. Once the child turns 18 or 21 (depending on your state and account type), they automatically take control. The custodian's role ends.

If the custodian dies or becomes unable to manage the account, the account does not automatically transfer to a new custodian. You need to name a successor custodian when you open the account, or the court may appoint one.

Tax Treatment and Reporting

The child pays taxes on the account's earnings—interest, dividends, and capital gains. The custodian reports this income on the child's tax return using the child's Social Security number. The first portion of earnings is usually tax-free (the amount changes each year), and earnings above that threshold are taxed at the child's rate, which is typically lower than an adult's rate.

There is a catch called the "kiddie tax" rule. If the child is under 18 (or under 24 in some cases and still a full-time student), earnings above a certain amount are taxed at the parent's rate, not the child's rate. This rule prevents parents from shifting high-income investments to children to avoid taxes. Once the child turns 18 (or 24 if still a student), all earnings are taxed at their own rate.

The custodian does not pay taxes on the account's growth—only the child does. This is one reason these accounts can be useful for long-term savings: money grows tax-deferred until the child takes control or the custodian withdraws it.

Impact on Financial Aid

Money in UGMA and UTMA accounts is counted as the child's asset when calculating financial aid. This means having $10,000 in a UGMA account will reduce the amount of financial aid a student receives more than having $10,000 in a parent's savings account would.

The federal financial aid formula assumes the student will contribute a percentage of their assets toward college costs each year. Parent assets are assessed at a lower rate. If you are planning to pay for college and want to maximize financial aid, putting money into a UGMA or UTMA account may not be the best choice. A 529 plan or Coverdell ESA may reduce the aid impact, depending on who owns the account.

This matters most if you think your child will receive need-based financial aid. If your family's income is high enough that aid is unlikely, the financial aid impact is less of a concern.

When the Child Takes Control

At the age of majority—18 in most states, 21 in a few—the child automatically takes control of the account. There is no court process, no paperwork to file. The custodian's authority simply ends. The child can then withdraw the money, move it to a different investment, or leave it where it is.

This is a hard cutoff. The custodian cannot hold onto the money "for the child's own good" or because they think the child is not ready. Once the child reaches that age, it is their money to use as they see fit. Some parents address this by using a trust instead of a UGMA or UTMA account, which allows more control over when and how the money is released.

If the child dies before reaching the age of majority, the account becomes part of their estate and passes according to their will or, if there is no will, according to your state's inheritance laws.

UGMA vs. UTMA: Which One to Choose

Most people choose UTMA because it is more flexible. UTMA accounts can hold real estate, artwork, life insurance policies, and other property that UGMA accounts cannot. If you think you might want to transfer property other than cash or securities to the account, UTMA is the better choice.

UGMA is older and is still available in every state, but UTMA is now available in all 50 states as well. There is no tax advantage to choosing one over the other. The main practical difference is what types of assets you can put in. If you only plan to deposit cash or buy stocks and mutual funds, either account works the same way.

Some states have different age-of-majority rules for UGMA versus UTMA. In a few states, UGMA accounts transfer control at 18 while UTMA accounts transfer at 21. Check your state's rules before opening an account if the age of transfer matters to your plan.

How to Open a UGMA or UTMA Account

You can open a UGMA or UTMA account at most banks, brokerages, and investment firms. The process is straightforward: you provide the child's name and Social Security number, name yourself as custodian, and fund the account. Most institutions have a standard form for this.

You will need the child's Social Security number. If the child does not have one yet, you can get one from the Social Security Administration before opening the account, or some institutions will let you open the account and add the number later.

There are no contribution limits for UGMA or UTMA accounts. You can put in as much as you want. However, there are gift tax rules: if you give more than a certain amount per year to any one person (the limit changes annually), you may have to file a gift tax return. For 2024, the annual exclusion is $18,000 per person. Gifts above that amount do not automatically trigger a tax, but they do count against your lifetime gift tax exemption. Talk to a tax professional if you are planning to transfer a large amount.

Frequently Asked Questions

Can I take money out of a UGMA or UTMA account for something other than the child's needs?

No. As custodian, you have a legal duty to use the money only for the child's benefit. Spending it on yourself or for unrelated purposes is a violation of that duty. The child could potentially sue you later for misusing the account. Legitimate uses include education, medical care, housing, food, and other necessities.

What happens if the custodian dies before the child reaches the age of majority?

If you named a successor custodian when you opened the account, that person takes over. If you did not name one, the account may go through probate or the court may appoint a custodian. This is why naming a successor custodian is important—it keeps the account out of court and ensures someone you trust manages it.

Can I change my mind and take the money back if I put it in a UGMA or UTMA account?

No. These accounts are irrevocable. Once the money is in the account, it legally belongs to the child. You cannot withdraw it and keep it for yourself. You can only withdraw it to pay for the child's needs or expenses.

Do UGMA and UTMA accounts affect Social Security or other government benefits?

Yes. Money in these accounts counts as the child's resource and may reduce means-tested benefits like Supplemental Security Income (SSI) or Medicaid. If the child receives or may receive SSI or Medicaid, talk to a benefits counselor before opening a UGMA or UTMA account. A special needs trust may be a better option.

Can I use a UGMA or UTMA account to save for college?

Yes, but it may reduce financial aid more than a 529 plan would. If you expect your child to receive need-based financial aid, a 529 plan owned by a parent typically has less impact on aid calculations. If financial aid is not a concern, a UGMA or UTMA account works fine for college savings and has no restrictions on how the money is used once the child takes control.