Quick Answer
UTMA and UGMA custodial accounts let an adult manage investments for a minor. Gifts are irrevocable, and only one custodian and one minor are allowed per account. Custodial accounts prohibit margin trading, short selling, and options trading, and control transfers to the minor at the age of majority.
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
| Feature | UTMA | UGMA |
|---|---|---|
| Full name | Uniform Transfers to Minors Act | Uniform Gifts to Minors Act |
| Asset types | Broader - securities, cash, real estate, patents, fine art | Limited - financial assets only (securities, cash, insurance) |
| Age of majority | Typically 18 or 21 (state-dependent; some states allow up to 25) | Typically 18 |
| Adoption | Adopted by all states | Adopted by all states (largely superseded by UTMA) |
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
- Custodial accounts prohibit three 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
What Should You Check on Exam Day?
- Can you explain the key asset and age differences between UTMA and UGMA?
- Do you know why custodial account gifts are irrevocable?
- Can you name the three activities prohibited in a custodial account?
- Do you know who owns the assets in a custodial account, the custodian or the minor?
- Can you explain what happens to control of the account at the age of majority?