Financial Planning
UTMA and UGMA Accounts: What Families Should Know
Author
Article Summary
Understanding the benefits, tradeoffs and tax considerations of custodial accounts for minors
For families who want to give a child a financial head start, custodial accounts can be a flexible way to transfer money or investments. A UTMA or UGMA account allows an adult, often a parent, grandparent or other family member, to set aside assets for a minor’s benefit.[1]
The adult serves as the account custodian and manages the assets until the child reaches the required age under applicable state law, which is commonly 18 or 21 but can vary by state.[1] At that point, the custodian is generally required to transfer control of the assets to the beneficiary.[2]
That flexibility can be helpful, but it also requires careful planning. Once assets are transferred into the account, they generally belong to the child.[2] That means the funds may ultimately be used differently than the original donor intended once the child gains control of the account.
What Are UTMA and UGMA Accounts?
UTMA stands for Uniform Transfers to Minors Act, and UGMA stands for Uniform Gifts to Minors Act.[1] Both account types allow assets to be transferred to a minor without requiring a formal trust.[1]
The two account types are similar, but there are some differences in what they may hold. UGMA accounts are generally associated with financial assets such as cash and securities, while UTMA accounts may allow a broader range of property, including certain tangible assets such as real estate or artwork, depending on state law.[3]
In either case, the custodian manages and invests the property on the child’s behalf until the child reaches the applicable age of majority or termination under state law.[2]
Contributions to a UTMA or UGMA account are generally considered irrevocable gifts to the child.[1] The custodian may make investment decisions, execute transactions and use funds, but the assets must be used for the minor’s benefit.[4]
There are generally no annual contribution limits for custodial accounts.[4] However, gifts may have federal gift tax reporting implications if they exceed the annual exclusion amount.[5] For 2026, the annual federal gift tax exclusion is $19,000 per recipient, or $38,000 per recipient when each spouse uses their annual exclusion.[5]
Potential Benefits of a Custodial Account
One of the biggest advantages of a UTMA or UGMA account is flexibility. Unlike accounts designed specifically for education, custodial account assets are not limited to college expenses and may be used for the child’s benefit more broadly.[4]
Depending on the family’s goals, funds could help pay for education, a vehicle, housing, career training, a business idea or other future expenses. Once the child takes control of the account, the assets may generally be used for any purpose.[4]
Other potential advantages include:
A broad range of investment options, including cash, stocks, bonds, mutual funds and exchange-traded funds.
The ability for parents, grandparents or other adults to contribute for the child’s benefit.[4]
No annual contribution limits, although gift tax reporting rules may apply.[4][5]
A relatively simple account structure compared with a trust.
These benefits can make custodial accounts useful for families who want to give a child financial flexibility, not just education-specific support.
Potential Tradeoffs to Consider
Custodial accounts also come with important limitations.
The first is control. Once assets are transferred into the account, they generally belong to the child.[2] When the child reaches the applicable age under state law, the custodian must transfer the assets to the beneficiary.[2] At that point, the child can decide how to use the money, even if the original donor had a different purpose in mind.
The second is financial aid. If the child later applies for need-based college financial aid, custodial account assets may be treated as student assets. Under the 2026–2027 federal Student Aid Index formula for dependent students, student assets are multiplied by 20% to determine the student’s contribution from assets.[6]
Parent assets are treated differently in the federal formula. For dependent students, parent discretionary net worth is multiplied by 12% before being incorporated into the broader parent contribution calculation, which uses progressive rates that can reach 47%.[6] This is why parent-owned assets, including certain education savings vehicles, may affect aid calculations differently than assets owned directly by the student.[6]
The actual effect on financial aid depends on the family’s full financial picture, the student’s dependency status, applicable FAFSA rules, institutional aid formulas and school-specific methodology.
How Custodial Accounts Are Generally Taxed
UTMA and UGMA accounts are taxable accounts. They do not offer the same federal tax treatment as a 529 plan, where distributions may be tax-free when used for qualified education expenses.[8]
Investment earnings in a custodial account — including interest, dividends and capital gains — are generally taxed in the child’s name. However, the IRS “kiddie tax” rules may apply when a child has unearned income above certain thresholds.[7]
For 2026, the IRS inflation adjustment guidance sets the applicable kiddie tax amount at $1,350.[7] In general, this means the first $1,350 of a child’s unearned income may be covered by the child’s standard deduction, the next $1,350 may be taxed at the child’s rate, and unearned income above $2,700 may be taxed at the parent’s rate if the kiddie tax rules apply.[7]
Because tax rules can vary based on the child’s age, income, filing requirements and family circumstances, families should consult a tax professional before making large contributions or realizing significant gains in a custodial account.
Custodial Accounts vs. 529 Plans
A UTMA or UGMA account may be a good fit when flexibility is the priority. The funds are not restricted to education expenses, and the account can support a wide range of future needs.[4]
A 529 plan may be more appropriate when the primary goal is education funding. A 529 plan is a qualified tuition program designed to help pay qualified education expenses, and distributions are generally tax-free when used for eligible costs.[8]
The right choice depends on the purpose of the gift, how much control the donor wants to retain, how important education-specific tax benefits are and whether future financial aid may be a concern.
Some families may use more than one strategy. For example, a 529 plan could be used for education savings, while a custodial account could provide broader flexibility for non-education needs.
Could a Custodial Account Be Right for Your Family?
A custodial account may make sense if you want to transfer assets to a child and are comfortable with the child eventually taking full control of the account. It may also be useful if you want the funds to support more than education expenses.
Before opening or funding a custodial account, consider:
What is the primary goal for the money?
How much control do you want after the child reaches adulthood?
Could the account affect future financial aid?
How might investment income be taxed?
Would a 529 plan, custodial Roth IRA, trust or another strategy better fit the goal?
How does this gift fit within your broader estate, tax and financial plan?
Final Thoughts
UTMA and UGMA accounts can be useful tools for families who want to transfer assets to a child in a simple and flexible way. They can help build long-term savings, introduce investing concepts and provide support for future opportunities.
But flexibility comes with tradeoffs. The assets generally belong to the child, control eventually transfers to the child, investment income may be taxable and the account may affect financial aid eligibility.[2][6][7]
A thoughtful approach can help families decide whether a custodial account fits their goals or whether another savings strategy may be more appropriate.
Sources
- Office of the Comptroller of the Currency — UGMA/UTMA account overview
https://www.helpwithmybank.gov/help-topics/investments-trusts/uniform-gifts-to-minors-account/ugma.html - FINRA — UTMA/UGMA account supervision and ownership guidance
https://www.finra.org/rules-guidance/guidance/reports/2019-report-exam-findings-and-observations/utma-and-ugma - Cornell Legal Information Institute — Uniform Gifts to Minors Act
https://www.law.cornell.edu/wex/uniform_gifts_to_minors_act_%28ugma%29 - FINRA — Ways to Invest for Children
https://syndication.finra.org/content/ways-invest-children - IRS — Frequently Asked Questions on Gift Taxes
https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes - S. Department of Education — 2026–2027 Federal Student Aid Handbook, Student Aid Index and Pell Grant Eligibility
https://fsapartners.ed.gov/knowledge-center/fsa-handbook/2026-2027/application-and-verification-guide/ch3-student-aid-index-sai-and-pell-grant-eligibility - IRS — Internal Revenue Bulletin 2025-45
https://www.irs.gov/irb/2025-45_IRB - IRS — Instructions for Form 8615
https://www.irs.gov/instructions/i8615 - IRS — Topic No. 313, Qualified Tuition Programs / 529 Plans
https://www.irs.gov/taxtopics/tc313
Case ID: 00714762
OneDigital® is a registered trademark of Digital Insurance LLC in the United States. Investment advisory services are offered through OneDigital Investment Advisors LLC, an affiliate of Digital Insurance LLC. These materials and the information provided are not designed or intended to be applicable to any person’s individual circumstances. These statements do not constitute an offer or solicitation in any jurisdiction. OneDigital Investment Advisors LLC and their associates are not estate planners and cannot provide tax or legal advice. Consult your estate-planning attorney or qualified tax advisor for specific advice regarding your situation.