A UGMA or UTMA account is a way for an adult to hold money or investments in a minor's name, with the minor taking full control when they reach the age of majority in your state.
The account belongs to the child from day one, but you (the custodian) manage it until they come of age. You can invest the money, spend it on the child's behalf, and make decisions about what it holds. When the child turns 18 or 21—depending on your state and which account type you choose—they get complete control and can do whatever they want with the balance, no questions asked.
UGMA stands for Uniform Gifts to Minors Act. UTMA stands for Uniform Transfers to Minors Act. UTMA is newer and more flexible; it lets you transfer a wider range of assets (real estate, intellectual property, business interests) beyond just cash and securities. Most states now use UTMA, but some still allow UGMA, and a few allow both. The rules are similar enough that people often use the names interchangeably.
Key Takeaways
- A UGMA or UTMA account is a custodial account where you control the money until the child reaches the age of majority, which is 18 or 21 depending on your state and account type.
- The money in the account belongs to the child for tax purposes from the moment you deposit it, which can lower your own tax burden but may trigger taxes on the child's earnings.
- Once the child reaches the age of majority, they own the account outright and can withdraw or spend all of it without your permission.
- UGMA accounts hold cash and securities only, while UTMA accounts can also hold real estate, business interests, and other property.
- Money in a UGMA or UTMA account counts heavily against financial aid calculations for college, potentially reducing the amount of aid the child can receive.
How the account works before the child comes of age
You open the account at a bank, brokerage, or investment firm in the child's name, with yourself listed as custodian. You contribute money or assets to it. The account has a tax ID number tied to the child, not to you.
As custodian, you can invest the money, buy and sell securities, withdraw funds, and spend the money on the child's behalf—but only for the child's benefit. You cannot use it to pay for things you would normally pay for anyway (like food or housing), and you cannot take the money for yourself. The line between "the child's benefit" and "your own use" is not always clear, which is why some families hire a tax professional to review their spending.
The child does not have to do anything. They do not sign documents or make decisions. The account is simply held in their name while you manage it.
Tax treatment and what you owe each year
The money in the account belongs to the child for tax purposes. That means the child (not you) owes tax on any earnings—interest, dividends, capital gains—that the account generates each year. For 2024, the first $1,300 of unearned income is tax-free for a dependent child. The next $1,300 is taxed at the child's rate (usually 10 percent). Anything above $2,600 is taxed at the parent's rate.
These thresholds change each year, so check the IRS website or a tax professional before filing. If the account earns very little, you may not owe any tax at all. If it earns a lot, the child will owe tax, and you will file a tax return for them or include the income on your own return depending on the amount.
You do not get a tax deduction for putting money into the account. The contribution itself is not tax-deductible. However, the money you contribute counts against your lifetime gift tax exemption if you give more than $18,000 per person per year (in 2024; this amount changes annually). Most families stay well below this limit, so gift tax is not a practical concern.
What happens when the child reaches the age of majority
The age of majority varies by state and account type. For UGMA accounts, it is usually 18. For UTMA accounts, it is often 21, though some states allow you to choose 18 or 21 when you open the account. A few states let you set it even higher—up to 25 in some cases—but this is rare and requires specific language in the account agreement.
When the child reaches that age, the account is theirs. You have no say in what happens next. They can withdraw all the money, close the account, leave it open, or do anything else they want. Many parents are surprised by how much control they lose at this moment. If you were hoping the money would be used for college or a car, but the child decides to spend it on something else, you cannot stop them.
Some families try to work around this by using a trust instead of a UGMA or UTMA account, because a trust can have conditions attached (like "the money goes to college expenses only"). A UGMA or UTMA account has no such conditions.
Impact on financial aid and college costs
Money in a UGMA or UTMA account is counted as the child's asset when calculating financial aid. The federal formula assumes the child will contribute about 20 percent of their assets toward college costs each year. So a $10,000 UGMA account reduces financial aid by roughly $2,000 per year.
Money in a parent's name is counted differently—the formula assumes parents will contribute about 5.6 percent of their assets. This means a UGMA or UTMA account can significantly reduce the amount of need-based aid the child receives, even though the money is meant to help pay for college.
If you are planning to pay for college and want to preserve financial aid, a UGMA or UTMA account may not be the best choice. A 529 college savings plan, a Coverdell ESA, or money held in the parent's name will have less impact on aid calculations. Talk to a financial planner or the college's financial aid office before deciding.
UGMA vs. UTMA: which one to choose
| Feature | UGMA | UTMA |
|---|---|---|
| What you can hold | Cash, stocks, bonds, mutual funds | Cash, stocks, bonds, mutual funds, real estate, business interests, intellectual property |
| Age of majority | Usually 18 | Usually 21 (varies by state; sometimes 18 or up to 25) |
| Available in all states | No; some states have phased it out | Yes; all states allow UTMA |
| Complexity | Simpler, fewer options | More flexible, more moving parts |
Most people choose UTMA because it is available everywhere and offers more flexibility. UGMA is still used in some states and for simple accounts (just a savings account or a few mutual funds), but UTMA does everything UGMA does and more.
The age of majority is often the deciding factor. If you want the child to have access at 18, UGMA is fine. If you want them to wait until 21 (or older), UTMA in a state that allows a later age is better. Check your state's rules before opening the account, because you cannot change the age of majority after the account is open.
Common reasons families use UGMA and UTMA accounts
Some families use these accounts to save for a child's future without the complexity of a trust. Others use them to shift income to a lower-tax household member (the child) when the child has little or no other income. Grandparents sometimes open UGMA or UTMA accounts as a way to give money to grandchildren without it counting against their estate for tax purposes.
Some families use them because they are simple to open and maintain—you can open one at almost any bank or brokerage with a few forms and the child's Social Security number. No lawyer is needed, and there are no ongoing filing requirements beyond the annual tax return if the account earns income.
However, the loss of control when the child comes of age is a real drawback. If you want to ensure the money is used for a specific purpose (college, a house down payment, starting a business), a trust or a 529 plan may be a better fit.
Frequently Asked Questions
Can I take money out of the account if I need it?
Only if you spend it on the child's benefit. You cannot withdraw money for your own use. What counts as "the child's benefit" is somewhat flexible—it can include education, medical care, housing, food, and enrichment activities—but it cannot include things you would pay for anyway or personal expenses. If you are unsure, ask a tax professional before withdrawing.
What happens if the child dies before reaching the age of majority?
The money in the account becomes part of the child's estate and is distributed according to the child's will or your state's intestacy laws. It does not automatically go back to you. This is one reason some families prefer a trust, where you can specify what happens to the money if the child dies.
Can I change who the custodian is?
Yes, but the process varies by institution. You can usually name a successor custodian (like a grandparent or older sibling) who takes over if you die or become unable to manage the account. Once you name a successor, you cannot change it without the account holder's permission, and once the child reaches the age of majority, the account is theirs regardless of who the custodian is.
Does the child know about the account?
Not automatically. You decide whether and when to tell them. Some parents tell the child early so they understand the money is theirs and learn about saving. Others wait until the child is older or until the account is about to transfer. There is no legal requirement to tell the child, but many families find it helpful for teaching purposes.
Can I move money from a UGMA to a UTMA account?
Not directly. The two are separate account types under different state laws. However, you can close the UGMA account and open a new UTMA account with the proceeds, though this may trigger tax consequences depending on what is in the account. Talk to a tax professional or the account holder before making this move.