When it comes to saving for a child’s future, custodial accounts like the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) offer valuable options. These accounts allow adults to transfer assets to minors, providing a straightforward way to save and invest for a child’s education, first home, or other significant future expenses. But what exactly are UGMA and UTMA accounts, and how do they work? Let’s break it down.

What are Custodial Accounts?

Custodial accounts are financial accounts set up by an adult (the custodian) for the benefit of a minor (the beneficiary). The primary purpose of these accounts is to transfer and manage assets for minors until they reach the age of majority, which varies by state but is typically 18 or 21.

UGMA vs. UTMA: What’s the Difference?

  1. UGMA (Uniform Gifts to Minors Act) Accounts:
    • Purpose: The UGMA was the first legislation to allow the transfer of assets to minors without the need for a formal trust.
    • Assets Allowed: UGMA accounts can hold financial assets such as stocks, bonds, mutual funds, and cash.
    • Control: The custodian manages the account until the minor reaches the age of majority, at which point the assets are transferred to the minor.
  2. UTMA (Uniform Transfers to Minors Act) Accounts:
    • Purpose: The UTMA is an expansion of the UGMA, allowing for a broader range of assets.
    • Assets Allowed: In addition to financial assets, UTMA accounts can hold real estate, art, patents, and other tangible and intangible assets.
    • Control: Similar to UGMA, the custodian manages the account until the minor reaches the age of majority. However, some states allow UTMA accounts to extend control until the minor is 25.

Key Features of Custodial Accounts

  1. Irrevocable Gifts: Once assets are transferred into a custodial account, they cannot be taken back. The transfer is permanent and irrevocable.
  2. Tax Implications: The assets in custodial accounts are taxed at the child’s tax rate, which is typically lower than the parent’s rate. However, there are limits to the tax benefits, and the “kiddie tax” rules may apply to unearned income over a certain threshold.
  3. No Usage Restrictions: Unlike 529 college savings plans, which are designated for educational expenses, custodial accounts have no restrictions on how the funds can be used once the minor takes control.
  4. Impact on Financial Aid: Assets in custodial accounts are considered the student’s property, which can significantly affect their eligibility for financial aid.

How to Open a Custodial Account

  1. Choose a Custodian: Typically, a parent or guardian acts as the custodian, but it can be any trusted adult.
  2. Select a Financial Institution: Most banks, credit unions, and brokerage firms offer custodial accounts.
  3. Fund the Account: Assets can be transferred into the account through cash, securities, or other allowable assets.
  4. Manage the Investments: The custodian is responsible for managing the investments until the minor reaches the age of majority.

Benefits and Considerations


  • Educational Planning: Custodial accounts can be a valuable tool for saving for a child’s education or other future expenses.
  • Flexibility: These accounts offer flexibility in terms of investment options and how the funds can be used.
  • Tax Advantages: Potential tax benefits make custodial accounts an attractive option for transferring wealth to minors.


  • Loss of Control: Once the minor reaches the age of majority, they have full control over the assets, which may not always align with the custodian’s intentions.
  • Financial Aid Impact: The assets are counted as the student’s, potentially reducing their eligibility for financial aid.

Custodial accounts under UGMA and UTMA provide a flexible and tax-advantaged way to transfer assets to minors, helping to secure their financial future. By understanding the key features, benefits, and considerations, parents and guardians can make informed decisions about using these accounts as part of their financial planning strategy.

Whether you’re saving for college, a first home, or another major milestone, custodial accounts offer a valuable tool to help your child achieve their dreams.

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