A UGMA or UTMA account is a way for an adult to hold money and investments in a child's name, with the child taking full control when they reach a certain age.

The names stand for Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA). Both work the same basic way: you open an account at a bank or brokerage, put money or investments into it under the child's Social Security number, and the child owns it — but you manage it until they're old enough to take over. The main difference is that UTMA accounts can hold more types of property, like real estate or business interests, while UGMA accounts are simpler and limited to cash and securities like stocks.

These accounts are popular for saving toward a child's future because the money grows in the child's name, which can have tax advantages. However, once the child reaches the age of majority (usually 18 or 21, depending on your state), the money becomes theirs to use however they want — not just for education or other specific purposes you might have intended.

Key Takeaways

  • A UGMA or UTMA account holds money or investments in a child's name, with an adult managing it until the child reaches the age of majority.
  • The child owns the account from day one, but you control how it's invested and spent until they take over, usually at age 18 or 21.
  • Money in the account grows with potential tax advantages because it's in the child's name, though the child may owe taxes on earnings above a certain amount.
  • Once the child reaches the age of majority set by your state, they have complete control and can spend the money on anything — there's no legal requirement to use it for education.
  • UTMA accounts can hold real estate and business interests, while UGMA accounts are limited to cash and securities like stocks and bonds.

How the account ownership and control work

You are the custodian — the adult who opens and manages the account. The child is the beneficiary — they own the money, but you make the decisions about how it's invested and spent while they're a minor. This is different from a trust, where you can set detailed rules about when and how the money is used. In a UGMA or UTMA account, your control ends on a specific date: when the child reaches the age of majority in your state.

The age of majority varies. Most states use 18, but some use 21. A few states let you choose between 18 and 21 when you open the account. Check your state's rules before opening, because you cannot change this date later. When that birthday arrives, the account automatically becomes the child's to manage, and you have no further say in how the money is spent.

You can only be the custodian for one child per account. If you want to save for multiple children, you need to open a separate account for each one. You can name a successor custodian — someone who takes over if you die or become unable to manage the account — but the child still takes full control at the age of majority.

Tax treatment and how earnings are taxed

The account grows in the child's name, which means the child pays taxes on the earnings, not you. For 2024, a child can earn a certain amount of investment income before owing any federal income tax. Above that threshold, the child owes tax on the excess — usually at a lower rate than you would pay, because the child is in a lower tax bracket. This is one reason parents use these accounts: the tax bill is smaller than it would be if the money were in the parent's name.

However, there is a rule called the kiddie tax that applies to children under a certain age (the rules are complex and depend on the child's age and the type of income). In some cases, investment earnings above a threshold are taxed at the parent's rate, not the child's rate. This rule is designed to prevent parents from shifting large amounts of income to children to avoid taxes. You should speak with a tax professional about how this affects your specific situation, especially if you're putting a large amount of money into the account.

The child receives a Form 1099 or other tax document each year showing the earnings. You or the child will need to report this on a tax return. The child may need to file their own return, or you may be able to report it on your return — again, this depends on the amount and your state's rules.

What you can and cannot do with the money

As custodian, you can spend money from the account on the child's behalf, but only for the child's benefit. This is a legal standard, not a detailed rule. It generally means you can pay for food, housing, education, medical care, and other direct needs. You cannot use the money to pay for things you would normally pay for anyway — for example, you cannot use it to cover the child's share of household groceries or rent if you're already providing those. The line between "the child's benefit" and "the parent's benefit" is not always clear, and different custodians interpret it differently.

You can invest the money in stocks, bonds, mutual funds, or other securities held at a brokerage. You can also keep it in a savings account at a bank. You cannot invest it in anything illegal or overly risky — you have a legal duty to manage the money reasonably, as a prudent person would.

You cannot borrow money from the account or use it as collateral for a loan. You cannot transfer the money to yourself or use it to pay your own bills. If you do, you may face legal consequences and the child could pursue a claim against you later.

UGMA vs. UTMA: which one to choose

UGMA accounts are simpler and older. They can hold cash, stocks, bonds, and mutual funds. UTMA accounts are newer and more flexible — they can hold real estate, business interests, patents, and other property in addition to the investments a UGMA can hold. If you think you might want to transfer property other than securities or cash, choose UTMA. If you're just saving money and investing in stocks or funds, either one works.

Availability varies by state. All states recognize UGMA, but not all states have adopted UTMA — a few still use only UGMA. When you open the account, the bank or brokerage will tell you which option is available in your state. In states that have both, UTMA is usually the default because it offers more flexibility.

The tax treatment is the same for both. The age of majority is set by your state, not by which account type you choose. The main practical difference is what kinds of property you can hold, so choose based on what you actually plan to put into the account.

How this compares to a 529 education savings plan

A 529 plan is another account designed to save for a child, but it's specifically for education expenses. The money grows tax-free if you use it for college, trade school, or certain other education costs. If you use it for something else, you pay taxes on the earnings plus a penalty.

A UGMA or UTMA account has no restrictions on how the money is used. Once the child takes control, they can spend it on anything. This flexibility is an advantage if you're not sure the child will go to college, or if you want to save for other goals like a car, a house down payment, or starting a business. It's a disadvantage if you want to may provide the money stays earmarked for education.

Another difference: money in a 529 plan is considered a parent asset for financial aid purposes, which means it has less impact on how much aid the child can receive. Money in a UGMA or UTMA is considered the child's asset, which can reduce financial aid more significantly. If you think the child will need financial aid for college, a 529 plan may be better. If financial aid is not a concern, a UGMA or UTMA offers more flexibility.

What happens when the child reaches the age of majority

On the date set by your state law, the account automatically transfers to the child. You no longer have any control. The child can withdraw all the money, close the account, or keep it open and continue investing. There is no requirement that they use it for education, a house, or any specific purpose. If you were hoping the money would be used for college and the child decides to use it for something else, you have no legal recourse.

This is one of the biggest differences between a UGMA/UTMA and a trust. In a trust, you can write detailed instructions about when and how the money is used, and those instructions are legally binding even after you die. In a UGMA or UTMA, your control ends on a specific date, period.

Some custodians have conversations with the child before the transfer date, explaining what the money was meant for and hoping the child will use it responsibly. This is a good idea, but it's not legally binding. The child is under no obligation to follow your wishes.

How to open a UGMA or UTMA account

You can open a UGMA or UTMA account at most banks and brokerages. Call or visit the website of the institution where you want to open it and ask for the custodial account process. You will need the child's Social Security number, your own identification, and proof of your relationship to the child (usually a birth certificate).

The process is straightforward and usually takes a few days to a week. You'll choose whether to open a UGMA or UTMA (if both are available in your state), decide how to invest the money, and fund the account. Some institutions have minimum opening balances, often $100 to $500, though some have no minimum.

Once the account is open, you can add money whenever you want. You can also name a successor custodian — someone who takes over if you die or become unable to manage the account. The successor custodian has the same duties and the same loss of control when the child reaches the age of majority.

Frequently Asked Questions

Can I change my mind and take the money back?

No. Once you put money into a UGMA or UTMA account, it belongs to the child. You cannot withdraw it for yourself or change your mind. You can only spend it on the child's benefit while they're a minor. This is a legal commitment, not a savings account you control.

What if the child needs the money before age 18 or 21?

You can withdraw money and spend it on the child's benefit — for medical care, education, or other needs. You do not need the child's permission. However, you cannot withdraw it for your own use, and you should keep records of what you spent it on in case questions arise later.

Does having a UGMA or UTMA account affect the child's financial aid for college?

Yes. Money in a UGMA or UTMA is considered the child's asset, which reduces the amount of need-based financial aid they can receive. A 529 plan is treated more favorably for financial aid purposes. If the child will likely need financial aid, talk to a financial aid advisor before opening a UGMA or UTMA.

Can I name myself as the successor custodian?

No. The successor custodian must be someone other than you — typically a family member or trusted adult. If you die, that person takes over managing the account until the child reaches the age of majority.

What happens if the custodian dies before the child reaches the age of majority?

The successor custodian you named takes over and manages the account until the child reaches the age of majority. If you did not name a successor, the court may appoint one, or the account may be transferred to the child's legal guardian. This is why naming a successor is important.