UGMA & UTMA Accounts Explained (And How They Differ)

For parents, grandparents, and financial planners, saving for a child’s future is often top of mind. Whether it’s for college, their first car, or simply a financial head start, providing a financial cushion for the next generation is a goal many hold dear. This is where UGMA and UTMA accounts come into play. While they both offer smart ways to save for a child’s future, they come with distinct features that might make one more suitable for your needs than the other.

If you’re weighing your options or simply want to learn how these accounts work, this blog will break down UGMA and UTMA accounts, explain their differences, and help you decide which one might be right for your financial planning.

Table of Contents

What Are UGMA and UTMA Accounts?

UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts are custodial accounts designed to hold and manage assets for minors until they reach adulthood. These accounts allow you to transfer money or other assets to a child without setting up a trust, making them simpler alternatives to more complex legal arrangements.

In a custodial account:

The donor (parent, grandparent, or another adult) transfers money or assets into the account.
A custodian (typically the donor or another trusted adult) manages the account on behalf of the minor until they reach the age of majority, which varies by state but is generally 18 or 21.

Here’s the core principle behind both accounts: they legally transfer ownership of the funds to the child while granting the custodian management authority until the child is old enough.

Benefits of Custodial Accounts

Both UGMA and UTMA accounts come with several advantages:

Ease of Setup – Unlike trusts, custodial accounts are straightforward to open at most financial institutions.
Flexibility in Use – The funds can be used for nearly any purpose that benefits the child, from educational expenses to extracurricular activities.
Tax Advantages – Earnings in these accounts are taxed at the child’s tax rate, which is typically lower than the donor’s rate, although there are limits (more on this later).

While both UGMA and UTMA accounts share these common features, their key differences lie in the types of assets they can hold and how they are regulated.

Difference Between UGMA and UTMA Accounts

While UGMA and UTMA accounts are often lumped together, there are important distinctions to be aware of:

1. Types of Assets They Can Hold

UGMA accounts are restricted to financial assets such as:

Cash
Stocks
Bonds
Mutual funds

UTMA accounts go a step further by allowing a broader range of assets, including:

Real estate
Art and collectibles
Patents or intellectual property rights

If you’re looking to invest in assets beyond traditional securities, a UTMA account may offer the flexibility you need.

2. State-Specific Regulations

UGMA accounts are universally recognized across all states. On the other hand, UTMA accounts are not available in every state, as their adoption depends on individual state laws. Be sure to verify whether UTMA accounts are supported in your state before proceeding.

3. Age of Majority

The age at which the child gains control over the account differs:

For UGMA accounts, the age of majority is typically 18 or 21, depending on state law.
For UTMA accounts, the custodian may have the option to delay the transfer of control until the child is 25 in some states. This flexibility can be appealing if you’re concerned about the child’s maturity level when handling significant funds.

4. Tax Implications

Both UGMA and UTMA accounts are subject to the “kiddie tax,” meaning unearned income above a certain threshold is taxed at the parent’s rate. For 2023, the first $1,250 of a child’s unearned income is tax-free, the next $1,250 is taxed at the child’s rate, and anything beyond $2,500 is taxed at the parent’s rate. While the tax rules are similar, it’s essential to consider these implications if you’re planning to deposit large sums.

Summary of Differences

Feature	UGMA Account	UTMA Account
Assets Allowed	Financial assets only	Financial + tangible
State Coverage	Available in all states	Varies by state
Age of Transfer	Typically 18 or 21	Up to 25 in some states
Flexibility	Less flexible	More flexible

When Should You Choose a UGMA Account?

A UGMA account may be the right choice if:

You’re planning to stick to traditional financial investments (such as stocks and bonds).
You’re looking for a simpler setup and management process.
The broader flexibility of a UTMA isn’t necessary for your needs.

These accounts are often better suited for families with straightforward financial goals centered around building cash or securities investments for a child.

When Should You Choose a UTMA Account?

A UTMA account may be the better choice if:

You wish to transfer non-financial assets, such as property or collectibles.
You want to maintain control of the assets until the child is older (potentially up to 25 years old in some states).

This is particularly useful in cases where you’re transferring assets that will take significant time to appreciate in value or that require a higher level of maturity to manage responsibly.

Things to Consider Before Opening a Custodial Account

Before you open a UGMA or UTMA account, here are some important factors to weigh:

Control Once the Child Reaches Maturity

When the child reaches the age of majority, they gain full control of the account and can use the funds as they wish. It’s important to consider whether the recipient will act responsibly with the money.

Impact on Financial Aid

Funds held in a UGMA or UTMA account are considered the child’s assets when applying for financial aid. This can significantly impact eligibility for need-based aid, as student assets are assessed at a higher rate than parental assets.

Consideration for Taxes

While these accounts offer tax advantages, large contributions or high earnings could still result in tax at the parent’s rate due to the kiddie tax rules. Consulting a financial advisor or tax professional may provide clarity.

Alternative Options

If custodial accounts don’t align with your goals, other options like 529 plans or setting up a trust might be worth considering.

Plan Ahead with the Right Tools

Both UGMA and UTMA accounts offer unique opportunities to invest in a child’s future, but the choice depends on your specific goals and the types of assets you intend to contribute. Whether you’re saving for college, helping with a down payment on a future home, or encouraging financial independence, these accounts are excellent tools when managed responsibly.

If you’re unsure which option aligns best with your needs, a qualified financial planner can help you assess your goals and make an informed decision. Ultimately, your careful planning today will give the next generation the financial foundation they need tomorrow.