UGMA vs. UTMA Custodial Accounts

If you’re looking to set aside money for your child’s future, whether it’s to begin a college savings fund or provide a financial head start, you may be considering a custodial account. Two common options are Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts. Both allow adults to transfer assets to a minor without setting up a trust, but they differ in the types of assets they can hold and how they’re structured. It’s important to know how UGMA vs. UTMA accounts differ so you can choose the right option to meet your financial goals and support your child’s future, as well as how these accounts can affect financial aid.

A financial advisor can help you create a plan for your family’s financial needs and goals.

UGMA vs. UTMA Accounts – The Basics

UGMA and UTMA accounts are custodial accounts that adults can set up for minors. They effectively serve as a trust, holding assets during the recipient’s childhood. You can deposit almost any type of financial product in these accounts, such as cash, stocks or bonds. The account, both its principle and any investment return, becomes the property of the recipient when they reach the age of majority, which is typically from 18 to 21.

This is an irrevocable transfer. Once you deposit funds into a custodial account under either of these laws, you cannot access or withdraw the money. It becomes the property of the minor recipient. The recipient also cannot access the money until they come of age. You cannot specify a purpose for the UGMA or UTMA account after the recipient comes of age, either. The money becomes theirs free of all encumbrances and conditions.

The account custodian manages any investment assets in the UGMA or UTMA account. The custodian can also withdraw funds to cover expenses related to the welfare or education of the minor recipient. You can name yourself the custodian of the account, although that does not change the irrevocable nature of the transfer. Another option is to have a professional asset manager take charge.

A UGMA or UTMA custodial account is a common vehicle for college savings plans. It allows parents to build a dedicated account for their children in a way that’s often tax-advantaged and beyond the reach of any third-party events.

UGMA vs. UTMA Accounts – Key Differences

A husband and wife review UGMA vs. UTMA custodial accounts.

While UGMA and UTMA accounts share the common purpose of transferring assets to minors without the need for a trust, they differ in a few key areas, most notably in the types of assets they can hold and in how they’re adopted across states.

1. Types of Assets Allowed

The most significant distinction lies in the kinds of assets each account can hold:

UGMA (Uniform Gifts to Minors Act): These accounts are limited to financial assets. This typically includes cash, stocks, bonds, mutual funds and life insurance policies. They are ideal for families who want to contribute monetary assets or market-based investments.
UTMA (Uniform Transfers to Minors Act): UTMA accounts are more flexible and can hold virtually any type of asset. This includes everything UGMA accounts can hold, plus physical assets like real estate, vehicles, fine art, intellectual property or even patents. This broader scope gives families more flexibility in how they structure long-term wealth transfers.

2. State Adoption and Availability

Another important difference is how these accounts are treated under state law:

UGMA accounts are available in all 50 states. This makes them universally accessible to donors who want a straightforward financial transfer vehicle for minors.
UTMA accounts are not adopted in every state. Vermont and South Carolina do not currently permit UTMA accounts. Additionally, even among the states that do allow them, specific rules, such as the age of termination or permissible assets, can vary. It’s important to review your state’s laws or consult with a financial advisor to ensure this account aligns with your goals.

UGMA vs. UTMA Accounts – Tax Implications

Unlike retirement or education-specific accounts, UGMA and UTMA accounts are not tax-deferred. This means that any income or capital gains generated from the investments in these accounts are subject to taxation in the year they are earned.

Taxable Investment Gains

All dividends, interest and capital gains earned within a UGMA or UTMA account are taxable. While the assets legally belong to the minor, the parent or guardian may need to file a tax return on the child’s behalf if the account’s earnings exceed the annual IRS income threshold for dependents. In some cases, the parent may also opt to report the unearned income on their own return using IRS Form 8814, though this could result in a higher overall tax bill.

Potential Tax Advantages

One of the tax-related benefits of custodial accounts is that earnings are typically taxed at the child’s lower income tax rate, at least up to a certain point. This can provide meaningful tax savings compared to having those gains taxed at a parent’s higher rate. However, this advantage is subject to the “kiddie tax” rules. As of 2025:

The first $1,350 of a child’s unearned income is tax-free.
The next $1,350 is taxed at the child’s rate.
Any unearned income over $2,700 is taxed at the parent’s marginal rate.

These thresholds are adjusted periodically for inflation, so it’s important to verify current limits. A financial advisor or tax professional can also provide guidance and help you minimize the tax impact.

How UGMA and UTMA Accounts Could Impact Financial Aid

When applying for financial aid, students and their families must complete the Free Application for Federal Student Aid (FAFSA). This form assesses the family’s financial situation to determine eligibility for federal and some state-based aid. As of the 2024–2025 academic year, the Student Aid Index (SAI) has replaced the Expected Family Contribution (EFC) as the official measure used to assess how much a family is expected to contribute toward college costs.

Student-Owned Accounts Count More Heavily

One of the most important distinctions in the FAFSA is how parental versus student assets are treated. Assets held in UGMA and UTMA accounts are considered the student’s property, even though a custodian manages them until the student reaches the age of majority. As a result, these accounts can significantly reduce financial aid eligibility.

Under the current FAFSA formula:

Student-owned assets are assessed at up to 20% of their value.
Parent-owned assets are assessed at a much lower rate, capped at 5.64%.

For example, if a student has $10,000 in a UGMA or UTMA account, up to $2,000 of that amount could count against their financial aid eligibility. In contrast, the same $10,000 held in a parent-owned account might reduce aid eligibility by only $564.

How to Minimize the Impact on Financial Aid

Because UGMA and UTMA accounts are classified as student assets, they can negatively impact aid awards more than other savings vehicles, such as 529 plans (which are typically considered parent-owned if set up that way). If maximizing need-based financial aid is a priority, it may be worth exploring strategies to spend down or shift these assets. For example, using them for qualified educational expenses before the FAFSA is filed.

Another strategy is to transfer the assets from a UGMA or UTMA account into a 529 college savings plan. Unlike UGMA and UTMA accounts, assets held in a 529 plan are considered parental assets, which are assessed at a lower rate for financial aid purposes. This can help preserve more financial aid eligibility for the student while still providing a tax-advantaged way to save for college expenses. However, these funds might be taxed more heavily later on, if they aren’t entirely used for college expenses.

Why Create UGMA and UTMA Accounts?

Deciding to open a UGMA or UTMA account can be a very personal decision based on your long-term savings goals. There are three key reasons to create a UGMA or UTMA custodial account.

Simplicity and security: This account is a statutorily defined trust. It allows a parent to set up a long-term trust for their child without having to pay for lawyers or formal custodians. In doing so, the parent can segregate a basket of assets dedicated to the child. While the parents can no longer access that money if the family needs it — for example, in the case of a job loss or medical events — the money is also safe from creditors, other family members and any other third parties.
To transfer ownership of financial products: A UGMA or UTMA account is one way for parents to transfer securities to a minor child. While they can move cash into a child’s name with relative ease, the law prohibits children from entering into binding contracts. This makes many more complicated financial products difficult to transfer without a trust structure. A UGMA or UTMA account allows you to transfer ownership of products like a mutual fund or an insurance contract to a minor.
Keep money away from teenagers: A parent or guardian who creates a UGMA or UTMA account may want to ensure that the account remains solvent when their child reaches adulthood. Putting it in a secured trust makes sure that no one, including the child beneficiary, can withdraw the funds early. It prevents concerns like careless spending during youth or adults taking advantage of a child.

Ultimately, you may want to talk to a financial professional to help you make this decision on whether you need one of these accounts or not, and which one to open.

Bottom Line

UGMA and UTMA accounts are types of custodial accounts, which allow an adult to store and protect assets for a minor until he or she reaches the age of majority. Though similar in a number of ways, there are differences to consider when comparing UGMA vs. UTMA accounts. These boil down to the asset makeup of the accounts and state adoption, as not all states allow UTMA accounts. There are potentially some tax-related upsides to UGMA and UTMA accounts, but remember that these are not tax-deferred assets like some other types of college savings vehicles.

Tips for Saving for Your Child’s College Education

A financial advisor can help you put a college education plan together for your family. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Another option for saving for your kid’s college education is a 529 college savings plan. You can use this tax-advantaged savings vehicle to stash up money to cover higher education expenses. Unlike UGMA and UTMA accounts, however, you can’t store financial products or real estate in 529 college savings plans.