UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) custodial accounts allow adults to transfer assets to minors without establishing a formal trust. The custodian (typically a parent or grandparent) manages the account until the child reaches the age of majority (18-25 depending on the state and account type).
8 steps across 1 sections
1. Steps Process
- Understand the difference between UGMA and UTMA — UGMA accounts hold only financial assets (cash, stocks, bonds, mutual funds, insurance policies); UTMA accounts can also hold real estate, art, pat...
- Choose a brokerage or bank — Open the account at any major brokerage (Fidelity, Schwab, Vanguard) or bank; compare fees, investment options, and minimum balance requirements
- Designate the custodian and beneficiary — The custodian manages the account; the beneficiary (minor) is the legal owner; use the child's Social Security number for the account since earnings are ta...
- Fund the account — Make initial and ongoing contributions; contributions are irrevocable gifts; annual gift tax exclusion is $19,000 per donor per recipient (2026) without triggering gift tax repor...
- Select investments — Choose age-appropriate investments based on the child's time horizon and the account's purpose; index funds and ETFs are common for long-term growth
- Manage and monitor the account — The custodian has a fiduciary duty to invest prudently for the child's benefit; keep records of all transactions
- File taxes on account earnings — First $1,350 of unearned income is tax-free (2026); next $1,350 taxed at the child's rate; above $2,700 taxed at the parent's marginal rate (kiddie tax) for childre...
- Transfer control at the age of majority — When the child reaches the transfer age (18 for UGMA, 18-25 for UTMA depending on state), you must transfer full control to them; the child can use the fun...
Common Mistakes
- Forgetting that gifts are irrevocable
- Not understanding the financial aid impact
- Ignoring the kiddie tax
- Assuming you can control how the child uses the money
- Using UTMA/UGMA instead of a 529 for college savings
Pro Tips
- UTMA/UGMA is ideal for non-education goals
- Consider gifting appreciated stock
- Use the tax-free income threshold strategically
- You can convert UTMA/UGMA to a 529
- Name a successor custodian