UGMA and UTMA accounts let an adult hold money and investments in a child's name, with the child taking control when they reach a set age

A UGMA account (Uniform Gifts to Minors Act) and a UTMA account (Uniform Transfers to Minors Act) are custodial accounts — legal structures that let a parent, grandparent, or other adult manage money and investments for a child until the child becomes an adult. The adult is the custodian; the child is the beneficiary. When the child reaches the age of majority (usually 18 or 21, depending on your state and which account type you choose), the account transfers entirely to them, and they can spend or invest it however they want.

The main difference between them is what you can put in. A UGMA account holds cash, stocks, bonds, and mutual funds. A UTMA account holds all of that plus real estate, artwork, patents, and other property. UTMA accounts also let you delay when the child takes control — you can set the transfer age higher than the state's default. Most new accounts opened today are UTMAs because they offer more flexibility, but UGMAs still exist and work the same way for the assets they allow.

Key Takeaways

  • A UGMA or UTMA account is held in the child's name but controlled by an adult custodian until the child reaches the age you or your state sets.
  • Money in the account belongs to the child for tax purposes, which can lower the total tax owed on investment gains, depending on the child's income.
  • When the child reaches the transfer age, they own the account outright and can spend it on anything — there is no restriction on how they use it.
  • UTMA accounts can hold real estate and other property in addition to cash and investments; UGMA accounts are limited to cash and securities.
  • Assets in these accounts do not count against federal financial aid calculations the same way parental assets do, which can affect student loan and grant amounts.

How the account works from opening to transfer

You open the account at a bank, brokerage, or investment firm in the child's name, with yourself listed as custodian. You provide the child's Social Security number, and the account gets its own tax ID. Money or property you put in becomes the child's asset when ready — you cannot take it back or use it for yourself, even if you contributed it.

While you are the custodian, you control all decisions: you decide what to invest in, when to buy or sell, and when to withdraw money. You can withdraw funds for the child's benefit — education, medical care, living expenses — but not for your own use. You file taxes on any income the account earns each year using the child's Social Security number. When the child reaches the transfer age (set by your state law or your choice at account opening), the account becomes theirs completely. You lose all control, and they can withdraw or spend the money however they choose.

Tax treatment and how it affects what you owe

Income earned in a UGMA or UTMA account is taxed in the child's name, not yours. This often means lower total taxes because the child may have little or no other income. The first portion of investment income — the amount varies by year and is set by the IRS — is tax-free. Income above that threshold is taxed at the child's rate, which is usually lower than yours.

However, there is a catch called the "kiddie tax." If the child is under 18 (or under 24 in some cases and still a full-time student), investment income above a certain threshold is taxed at the parent's rate, not the child's rate. This rule prevents parents from shifting large amounts of investment income to children to avoid taxes. Once the child turns 18, all income is taxed at their own rate. You will receive a tax form (1099) each year showing the account's earnings, and you report that on the child's tax return.

How these accounts affect financial aid and student loans

Assets held in a UGMA or UTMA account are counted as the child's assets when calculating federal financial aid, not as parental assets. This matters because the formula expects students to contribute a higher percentage of their own assets toward education costs than parents do. A dollar in a UGMA account can reduce financial aid more than a dollar in a parent's savings account.

If you are planning to use these accounts to save for college, this is worth understanding before you open one. Some families find it better to hold education savings in a parent's name or in a 529 plan (which has different financial aid treatment) rather than a custodial account. Talk to a financial planner or your school's financial aid office about how the account will affect your specific situation.

When the child takes control and what happens next

The transfer happens automatically on the date set by your state law or the date you chose when opening the account. You do not file paperwork or ask permission. The account straightforward becomes the child's, and you no longer have any legal right to it. If the child is a minor on the transfer date, the account is held in their name but they cannot access it until they reach the legal age of majority in your state (usually 18).

Once they have access, they can withdraw the money, close the account, or keep it invested. There is no legal requirement for them to use it for education, medical care, or any particular purpose. This is why it is important to have a conversation with your child about your intentions for the money before they reach the transfer age — the account does not enforce any restrictions on their use of it.

UGMA vs. UTMA: which one to choose

If you are opening a new account, UTMA is almost always the better choice. It allows everything UGMA allows, plus real estate and other property. It also lets you set the transfer age higher than your state's default, giving you more control over when the child takes over. The only reason to choose UGMA is if you are in a state that no longer allows new UTMA accounts (rare) or if you are only depositing cash or straightforward securities and prefer the simpler structure.

The transfer age varies by state. Most states default to 18 or 21 for UGMA accounts and allow you to choose up to 25 for UTMA accounts. Check your state's law or ask the financial institution where you plan to open the account — they will tell you what ages are available and what the default is if you do not specify.

Custodian responsibilities and what you cannot do

As custodian, you have a legal duty to manage the account in the child's best interest, not your own. You cannot borrow from the account, use it to pay your own bills, or invest it recklessly. You also cannot change the beneficiary or take the money back if you change your mind about the gift. If you do any of these things, you can face legal liability and tax penalties.

You are responsible for keeping records, filing tax returns, and making investment decisions. If the child is old enough, you might involve them in those decisions to teach them about money, but you are not required to. You can also name a successor custodian in case you die or become unable to manage the account — the successor takes over your duties until the child reaches the transfer age.

Frequently Asked Questions

Can I change my mind and take the money back out of a UGMA or UTMA account?

No. Once you deposit money or property into the account, it belongs to the child legally. You cannot withdraw it for yourself or change your mind about the gift. You can only withdraw funds for the child's benefit — education, medical care, living expenses — and the money still belongs to the child.

What happens if I die before the child reaches the transfer age?

The account does not go into your estate. It continues to exist in the child's name, and a successor custodian you named (or one appointed by the court) takes over managing it until the child reaches the transfer age. If you did not name a successor, the court will appoint one.

Can the child access the money before the transfer age?

Not on their own. You as custodian control all withdrawals. You can withdraw money for the child's benefit — to pay for school, medical bills, or living expenses — but the child cannot demand the money or access it directly until they reach the transfer age set by your state or account agreement.

Does opening a UGMA or UTMA account affect the child's credit or taxes before the transfer age?

It does not affect credit — the account is in the child's name but does not build credit history. It does affect taxes: any income the account earns is reported on the child's tax return using their Social Security number. You will receive a 1099 form each year showing the earnings.

Can I open a UGMA or UTMA account if I am not the parent?

Yes. Grandparents, aunts, uncles, or other adults can open these accounts for a child. You do not have to be the parent. You will need the child's Social Security number and permission from the parent or legal guardian in some states, so check your state's rules before opening.