A UGMA or UTMA account is a way for an adult to hold money or investments in a child's name, with the child gaining full control when they reach the age of majority in their state.

The two acronyms stand for the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). Both are legal frameworks that let a parent, grandparent, or other adult put assets into an account that belongs to the child but is managed by an adult trustee until the child comes of age. The main difference is scope: UGMA accounts hold money, securities, and some insurance products, while UTMA accounts can also hold real estate, artwork, patents, and other property.

The account is irrevocable—once money goes in, it belongs to the child, not the adult who deposited it. This matters for taxes, for financial aid calculations, and for what happens if the adult's circumstances change. When the child reaches the age of majority (usually 18 or 21, depending on your state and which act you use), the account transfers to them completely, and they can spend it however they want.

Key Takeaways

  • A UGMA or UTMA account is owned by the child but managed by an adult trustee until the child reaches the age of majority in your state.
  • Money deposited into these accounts is a completed gift and cannot be taken back, even if the adult's financial situation changes.
  • The child pays income tax on earnings above a certain threshold, but the first portion of earnings may be taxed at the child's rate rather than the parent's.
  • These accounts count as the child's asset on the Free process for Federal Student Aid (FAFSA), which can reduce financial aid may be able to access more than a parent-owned account would.
  • When the child reaches the age of majority, they gain complete control of the account and can withdraw the money for any reason.

How the account is set up and who controls it

You open a UGMA or UTMA account at a bank, brokerage, or investment firm in the child's name. The account title will read something like "John Smith, as custodian for Sarah Smith under the [State] Uniform Gifts to Minors Act." You name yourself (or another adult) as the custodian—the person who manages the account and makes investment decisions until the child comes of age.

The custodian has a legal duty to act in the child's best interest. This means you cannot use the money for your own purposes, and you cannot make reckless investments. You can, however, use the account to pay for expenses that benefit the child—education, medical care, living expenses—though this is a gray area and varies by state. Some states say you can only withdraw for necessities; others are more permissive. Check your state's rules before you start withdrawing.

The custodian role does not automatically pass to someone else if you die or become incapacitated. You should name a successor custodian when you open the account, or update your will to specify who should take over. If no successor is named and you cannot manage the account, a court may have to appoint one, which creates delay and expense.

Tax treatment and what the child owes

The child is the owner of the account, so the child is responsible for reporting the income. For 2024, the first $1,450 of unearned income (interest, dividends, capital gains) is tax-free for a dependent child. The next $1,450 is taxed at the child's rate, which is usually lower than the parent's rate. Anything above $2,900 is taxed at the parent's rate under the "kiddie tax" rule.

These thresholds change each year, so check the IRS website or ask a tax professional for the current year. If the account earns very little, you may not need to file a return at all. If it earns more, you file a Form 1040 or Form 1040-SR in the child's name, even if the child has no income from work.

The custodian does not pay the tax—the child does, or the parent files on the child's behalf. This is different from a 529 plan, where earnings can grow tax-free if used for education. UGMA and UTMA accounts have no special tax shelter, so they are best used for money you do not expect to earn much interest.

Impact on financial aid and college costs

UGMA and UTMA accounts are counted as the child's asset on the FAFSA. This matters because the formula assumes the child will contribute a much higher percentage of their own assets to college costs than the parents will contribute from theirs. A child's asset is expected to contribute roughly 20 percent per year toward college; a parent's asset is expected to contribute 5 to 6 percent.

This means a $10,000 UGMA account can reduce financial aid by roughly $2,000 per year, while a $10,000 parent-owned account might reduce aid by only $500 to $600. If you are planning to pay for college with financial aid, a UGMA or UTMA account can work against you. If you are paying out of pocket or expect merit scholarships, the tax savings may outweigh the aid reduction.

Some families use UGMA accounts for money they do not plan to use for college—gifts from grandparents, money the child earned from work, inheritances. Others avoid them entirely and keep college savings in a parent-owned account or a 529 plan, which has better financial aid treatment.

When the child reaches the age of majority

The age of majority is 18 in most states, but some states set it at 21 for UTMA accounts (UGMA is usually 18). On that date, the account automatically transfers to the child, and the custodian's authority ends. The child can then withdraw the money, change the investments, or do anything else they want with it.

This is not a gradual handoff. The child does not have to ask permission, and the custodian cannot refuse to transfer the account. If the child is not financially mature and you are worried about what they will do with a large sum, a UGMA or UTMA account is not the right tool. You might instead consider a trust, which allows you to set conditions on when and how the money is distributed, but a trust is more expensive to set up and maintain.

Some custodians ask the child to sign a document acknowledging the transfer, but this is for record-keeping only. The child is not obligated to sign anything or to follow the custodian's information about how to use the money.

UGMA versus UTMA: which one to choose

UGMA accounts are simpler and more widely available. They hold cash, stocks, bonds, mutual funds, and some insurance products. UTMA accounts are broader and can hold real estate, artwork, patents, and other property, but they are not available in all states and some financial institutions do not offer them.

For most families saving for a child's future, UGMA is sufficient. You would choose UTMA only if you want to transfer real property (like a rental house) or other unusual assets into the account. If your state does not offer UTMA, or if your bank does not support it, UGMA is your only option anyway.

Both accounts have the same tax treatment, the same impact on financial aid, and the same transfer rules at the age of majority. The choice between them is usually about what assets you want to hold and what your state and financial institution support.

Alternatives to UGMA and UTMA accounts

A 529 plan is a tax-advantaged savings account for education. Earnings grow tax-free if used for tuition, room and board, books, or other may have access to education expenses. The account owner (usually the parent) keeps control, so the money does not transfer to the child at age 18. This makes 529 plans better for families worried about financial aid or about the child's spending habits.

A trust gives you more control over when and how the child receives the money. You can specify that distributions happen at age 25, 30, or later, or that the money is used only for education or medical care. Trusts are more expensive to set up and require ongoing administration, but they offer flexibility that UGMA and UTMA accounts do not.

A parent-owned investment account (not in the child's name) keeps the assets off the FAFSA and gives you full control. You pay the taxes on earnings, but you also keep the money if your circumstances change. This is simpler than a UGMA account but offers no tax advantage to the child.

Frequently Asked Questions

Can I take money out of a UGMA account if I need it?

Legally, no. The money belongs to the child, and you can only withdraw it for expenses that benefit the child—education, medical care, living expenses. Using it for your own bills or debts is a breach of your duty as custodian. Some states are stricter than others about what counts as a benefit to the child, so check your state's law.

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, the account may go through probate or require a court to appoint a new custodian, which delays access to the money. Always name a successor custodian and update it if that person's circumstances change.

Can I change my mind and close the account?

No. UGMA and UTMA accounts are irrevocable gifts. Once the money is in the account, it belongs to the child, and you cannot take it back or close the account without the child's consent (once they reach the age of majority). This is a permanent decision, so think carefully before you fund the account.

Does a UGMA account affect the child's ability to get student loans?

Yes, indirectly. The account is counted as the child's asset on the FAFSA, which reduces financial aid may be able to access. This means the child may have to borrow more in student loans to make up the difference. The account itself does not disqualify the child from loans, but it changes how much aid they are offered.

Can I invest the money in stocks or only keep it in savings?

You can invest in stocks, bonds, mutual funds, and other securities, depending on what the financial institution offers. You have a duty to invest prudently and in the child's best interest, so extremely risky or speculative investments could be questioned. Most custodians invest conservatively, especially as the child gets closer to the age of majority.