Custodial Accounts (UTMA/UGMA)

Custodial accounts allow adults to manage investments on behalf of minors. They come with strict rules about ownership, permitted activities, and when control transfers to the minor.

UTMA vs. UGMA

Exam Tip: Gotchas

• UTMA allows broader assets (real estate, patents, fine art); UGMA is limited to financial assets.
• UTMA age of majority varies by state, so always check the question for specifics.

Key Rules

• Created by an adult (custodian) for the benefit of a minor (beneficiary)
• One custodian, one minor per account; no exceptions
• Gifts are irrevocable; once given to the minor, the assets cannot be taken back
• Account is registered in the custodian's name for the benefit of the minor
  • Example: "Jane Doe, custodian for John Doe under UTMA"
• Custodian manages the account until the minor reaches the age of majority
• Once the minor reaches the age of majority, they gain full control of the assets

Exam Tip: Gotchas

• The minor owns the assets, not the custodian. The custodian is just the manager.
• Gifts are irrevocable. Once transferred, the custodian cannot take them back.

Prohibited Activities

Custodial accounts have strict trading restrictions:

• No margin trading - cannot borrow against the account
• No short selling - cannot sell securities the account does not own
• No options trading - cannot trade options contracts
• The custodian cannot use the assets for their own benefit - the assets belong to the minor

Exam Tip: Gotchas

• Three prohibited activities: no margin, no short selling, no options. The exam frequently tests these in scenario questions.

Tax Treatment

• Income earned in the account is taxed at the minor's tax rate
• Subject to kiddie tax rules - unearned income above certain thresholds may be taxed at the parent's rate