Understanding the Differences Between UGMA and UTMA Accounts

When planning for a child's financial future, custodial accounts offer an option to transfer assets while providing some control over how those assets are managed. Two common types of custodial accounts are UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts. While they share many similarities, understanding their differences can help parents, guardians, and investors make informed decisions about which account best fits their goals.

This article explains the key distinctions between UGMA and UTMA accounts, how each works, and what factors to consider when choosing between them.

What Are UGMA and UTMA Accounts?

Both UGMA and UTMA accounts are custodial accounts that allow adults to transfer assets to a minor without setting up a formal trust. The adult acts as a custodian, managing the account until the child reaches the age of majority, which varies by state but is typically 18 or 21 years old.

• UGMA accounts were the first type of custodial account created, allowing gifts of cash, securities, and insurance policies.

• UTMA accounts expanded on UGMA by allowing a wider range of assets, including real estate, art, patents, and other tangible property.

  
  

Both accounts are designed to help minors receive financial gifts or inheritances in a controlled manner, with the custodian managing the assets until the child is legally able to take control.

Key Differences Between UGMA and UTMA Accounts

Types of Assets Allowed

The most significant difference lies in the types of assets each account can hold:

• UGMA accounts accept financial assets such as cash, stocks, bonds, and mutual funds.

• UTMA accounts accept all assets allowed under UGMA plus additional assets like real estate, fine art, patents, royalties, and other tangible personal property.

  
  

This flexibility makes UTMA accounts more versatile for transferring a broader range of assets to a minor.

Age of Termination

The age at which the minor gains control of the account varies:

• UGMA accounts typically transfer control at 18 years old.

• UTMA accounts allow states to set the age of termination, often extending control to 21 years old or even 25 in some states.

  
  

This extended control period under UTMA can be useful if the custodian wants to delay the minor’s access to the assets until they are more mature.

State Law Variations

Both UGMA and UTMA accounts are governed by state laws, which means rules can differ depending on where the account is opened. Some states have adopted UTMA laws, while others still use UGMA or both. It’s important to check local regulations to understand the specific age of termination and asset rules.

Tax Considerations

Both accounts are subject to the kiddie tax, which means unearned income above a certain threshold is taxed at the parent's tax rate. However, the tax treatment of assets inside the accounts is generally similar.

Contributions to either account are considered irrevocable gifts, so the donor loses control over the assets once transferred. The child is responsible for taxes on any income generated by the account.

How UGMA and UTMA Accounts Work

Opening an Account

An adult custodian opens the account in the child’s name. The custodian manages the assets, makes investment decisions, and files any necessary tax returns on behalf of the minor.

Contributions and Gifts

Anyone can contribute to the account, but once assets are deposited, they belong to the minor. The custodian cannot use the funds for their own benefit.

Control Transfer

When the minor reaches the age of majority defined by state law, control of the account transfers to them. At that point, the child can use the funds for any purpose.

Upon the death of a UGMA/UTMA custodian, the successor is typically the person designated by the original custodian in their will or via a prior written designation. If no successor was named, the legal guardian of the minor becomes the custodian. If none exists, an adult family member or a court-appointed person takes over.

Practical Examples

• A parent wants to gift stocks to their 10-year-old child. They open a UGMA account and transfer shares. The custodian manages the stocks until the child turns 18, then the child gains full control.

• A grandparent wants to gift a piece of real estate to a 15-year-old grandchild. Since UGMA accounts do not allow real estate, they open a UTMA account instead. The custodian manages the property until the child turns 21, when ownership transfers.

  
  

Factors to Consider When Choosing Between UGMA and UTMA

• Type of assets you want to transfer: If you plan to gift only financial assets, UGMA may suffice. For real estate or collectibles, UTMA is necessary.

• Desired age of control: UTMA offers more flexibility with the age when the child gains control.

• State laws: Check your state’s rules to understand which account is available and the age limits.

• Investment goals: Both accounts allow for investment growth, but the custodian must manage the assets responsibly.

• Tax implications: Both accounts have similar tax rules, but consult a tax advisor for personalized advice.

  
  

Advantages and Disadvantages

Advantages of UGMA/UTMA Accounts:

• Use of Funds: Unlike 529 plans, funds in a UTMA and UGMA account can be used for any purpose, not just education (e.g., tuition, buying a car, starting a business, or paying for a wedding, or just cost of living).

• No Limits on Contribution: Anyone can contribute, with no annual income limits, though gifts over a certain threshold ($19,000 for 2026) may require a gift tax return.

• Investment Variety: Allows for diverse portfolios, including stocks, bonds, mutual funds, and (in UTMAs) real estate.

• Tax Advantages: A portion of earnings is tax-free, and the rest is taxed at the child's lower rate (up to certain thresholds).

  
  

Disadvantages of UGMA/UTMA Accounts:

• The Gift is Irrevocable: Once money is deposited, it belongs to the child and cannot be taken back. Changes in the spending habit of children may lead to regrets about setting up these accounts.

• Loss of Control: Changes in the spending habit of children may lead to regrets about setting up these accounts. The child takes full control of the assets at the age of majority (usually 18 or 21), regardless of their maturity level.

• Financial Aid Impact: These are considered the student's assets, which are assessed more heavily in student-aid FAFSA calculations than parent-owned assets.

• You Cannot Change the Beneficiary: Unlike 529 plans, the beneficiary is irrevocable. This can be a very concerning aspect of these accounts (e.g.: if the child decides not to use the money for its intended use).

Because of the disadvantages of these accounts it if often recommend to consider a trust. See our articles regarding advantages of trusts over beneficiary accounts such as TOD and UTMA/UGMA designations.

Summary

UGMA and UTMA accounts provide a straightforward, albeit imperfect, way to transfer assets to minors while maintaining control until they reach adulthood. The main difference is the range of assets allowed and the age when the minor gains control. UGMA accounts are limited to financial assets and usually transfer control at 18, while UTMA accounts accept a wider variety of assets and often allow control to transfer later.