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"

How Do UGMA and UTMA Compare?

Exam Tip: Gotchas

• UTMA is more flexible than UGMA (any property type vs. financial assets only).

What Are the Key Custodial 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.

How Does the Kiddie Tax Apply to These Accounts?

Because the minor legally owns the assets in a UTMA/UGMA account, the dividends, interest, and realized capital gains the account generates each year count as the minor's own unearned income, not the custodian's or the parent's.

That is exactly the income the kiddie tax rules were written to limit. Without them, a parent could shift investment income into a custodial account and have it taxed at the child's low bracket instead of their own.

• Applies to children under 18 (no support test), or age 18-23 if they meet the dependent age test (under 19, or a full-time student under 24)
• For the 18-23 group only, an additional support test applies: the child's earned income cannot exceed half of their own support
• Two more conditions apply regardless of age group: at least one parent must be alive at year-end, and the child must not file a joint return
• The kiddie tax ensures parents cannot shift large amounts of investment income to children at lower tax rates

Exam Tip: Gotchas

• The half-of-support test applies only to the 18-23 group. A 12-year-old with a paper route is subject to the kiddie tax on unearned income no matter how much they earn, while a 20-year-old full-time student who covers more than half their own support escapes it entirely.

How Do UTMA/UGMA Accounts Affect Financial Aid?

• UTMA/UGMA assets are considered the student's assets for Free Application for Federal Student Aid (FAFSA) purposes
• Under the current Student Aid Index (SAI) formula, student assets are assessed at up to 20%, versus a flat 12% for parent assets
• 529 plan assets owned by a parent are considered parent assets (more favorable for financial aid)

Exam Tip: Gotchas

• UTMA/UGMA = student asset (up to 20% FAFSA impact). Parent-owned 529 = parent asset (12%). This makes 529 plans significantly better for financial aid eligibility.

What Should You Check on Exam Day?

• UTMA/UGMA gifts are irrevocable; the minor owns the assets from the moment of transfer, and the custodian cannot take them back.
• UGMA holds only cash, securities, insurance policies, and annuities; UTMA holds any property type, including real estate, patents, royalties, and fine art.
• Custodianship terminates at the age of majority: typically 18 for UGMA, or 18-21 (up to 25 in some states) for UTMA, after which the former minor can use the funds for any purpose.
• No margin trading, short selling, or options are permitted in a custodial account.
• Kiddie tax applies to children under 18 (no support test), or age 18-23 if they meet the dependent age test and the earned-income-under-half-of-support, living-parent, and no-joint-return conditions.
• UTMA/UGMA counts as a student asset for FAFSA (up to 20% impact); a parent-owned 529 counts as a parent asset (12% impact).