UTMA and UGMA
Custodial accounts created by an adult (custodian) for the benefit of a minor (beneficiary). Gifts to the account are irrevocable - once transferred, the property belongs to the minor. Each account has one custodian, one minor.
Account titled: "[Custodian name], as custodian for [Minor name] under [state] UTMA/UGMA"
UGMA vs. UTMA
| Feature | UGMA | UTMA |
|---|---|---|
| Permissible assets | Cash, securities, insurance policies, annuities | All property types including real estate, patents, royalties, fine art |
| Adoption | All 50 states originally; largely replaced by UTMA | Adopted by most states |
| Age of termination | Typically 18 (age of majority) | Varies by state: 18 or 21 (some states allow up to 25) |
Exam Tip: Gotchas
- UTMA is more flexible than UGMA (any property type vs. financial assets only).
Key Rules
- Custodian has fiduciary duty to manage the account for the minor's benefit
- Custodian cannot use the assets for their own benefit
- No margin trading, short selling, or options in custodial accounts
- No limit on contributions, but contributions are subject to gift tax rules ($19,000 annual exclusion per donor, 2025-2026)
- The minor is the legal owner of the assets; custodianship terminates at the age of majority
- Account funds can be used for the minor's benefit but not for expenses the parent is legally obligated to provide (basic support)
- No restrictions on how the minor uses the funds once custodianship terminates
Think of it this way: A custodial gift is like dropping a letter into a mailbox. Once it's in, you cannot retrieve it. The minor legally owns the assets from the moment of transfer, and the custodian is just managing them until the minor reaches the age of majority.
Exam Tip: Gotchas
- Gifts are irrevocable and become the minor's property at the age of majority. The custodian cannot take the money back, and the minor can spend it on anything (not just education). This is a critical difference from 529 plans, where the owner retains control.
Kiddie Tax (2025)
| Income Bracket (2025) | Tax Treatment |
|---|---|
| First $1,350 | Tax-free |
| Next $1,350 ($1,351 - $2,700) | Taxed at the child's rate |
| Above $2,700 | Taxed at the parent's marginal rate |
- Applies to children under 18, or under 19 if not self-supporting, or full-time students under 24
- The kiddie tax ensures parents cannot shift large amounts of investment income to children at lower tax rates
Exam Tip: Gotchas
- Kiddie tax applies to children under 18, under 19 if not self-supporting, or full-time students under 24.
Impact on Financial Aid
- UTMA/UGMA assets are considered the student's assets for Free Application for Federal Student Aid (FAFSA) purposes
- Student assets are assessed at a higher rate (up to 20%) than parent assets (up to 5.64%) for expected family contribution
- 529 plan assets owned by a parent are considered parent assets (more favorable for financial aid)
Exam Tip: Gotchas
- UTMA/UGMA = student asset (20% FAFSA impact). Parent-owned 529 = parent asset (5.64%). This makes 529 plans significantly better for financial aid eligibility.