UGMA vs. UTMA: What’s the difference?

Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are both custodial accounts designed to help adults save and invest on behalf of a minor child. The key differences come down to what types of assets you can put into each type of account, your state’s specific rules for these accounts and when the child gains full control of the money.

Note that whether you can open an UGMA or UTMA account depends on where you live. If you live in South Carolina or Vermont, you can open an UGMA account. If you live anywhere else, UTMA will be the account type you can open and control. While it is technically possible to have your custodial account governed by the laws of a different state, it isn’t something that happens frequently.

Custodial account basics: Building a financial foundation for kids

A custodial account is a financial account opened and managed by an adult (referred to as the custodian) for the benefit of a minor. The custodian oversees the account until the child reaches the age of termination, which depends on the state. At that point, the assets are supposed to be transferred to the child.

These accounts are relatively straightforward. Prior to the child reaching the age of termination, the custodian makes investment decisions, and manages contributions and withdrawals, all for the benefit of the child. Assets placed into a UGMA or a UTMA account are considered an irrevocable gift, meaning they legally belong to the child even though the custodian manages them.

Families may choose to use custodial accounts as a flexible way to save and invest on a child’s behalf, whether for education or other future expenses. Plus, these accounts can facilitate straightforward financial gifting while allowing the funds to grow over time. Custodial accounts don’t have contribution caps or early withdrawal taxes either (though there are still some tax implications – more on those below). They’re also relatively simple and may be less expensive to set up compared with a trust.

The age of majority for UGMA and UTMA accounts is typically 18 or 21 and depends on the state in which you live. Additionally, the age at which the child assumes full control of the assets in a UTMA account may be determined by the custodian when first opening the account (this is called the “age of termination”) – but not later. For example, New York UTMAs default to age 21, but the custodian can stipulate 18 when the account is opened.

Once the account is fully transferred to the child who has reached the age of termination, the assets are transferred to their name and they have full discretion over how the money is used, regardless of the intentions the original custodian may have had for the account assets.

If you have the chance to select the age of termination for the custodial account, you may consider selecting an older age as it gives the custodian more time to manage the assets before they are fully transferred to the child, which can be helpful when larger or more complex assets are involved.

Potential tax implications for UGMA and UTMA accounts

The assets in UGMA and UTMA accounts belong to the child. Contributions are not tax-deductible. However, there are potential tax implications to be mindful of with these accounts.

For 2026, $19,000 is the maximum amount that can be gifted from one individual to another without triggering gift tax reporting. (This is known as the annual exclusion amount.) If you or another adult gift more than $19,000 to a child’s custodial account, a gift tax return may need to be filed to report the excess.

In most cases, the excess over $19,000 counts toward a person's lifetime gift tax exemption of $15 million rather than triggering an immediate tax bill. The annual exclusion applies per person and per recipient, so relatives or family friends may also be able to gift money and assets up to the annual limit without affecting the other person’s annual exclusion. For example, in 2026, you could gift up to $19,000 to your child and then your brother could also gift up to $19,000 to your child, for a total of $38,000.

If parents contribute more than $19,000 to their child’s custodial account, they may be required to file a gift tax return even if the combined amount isn’t more than $38,000. It depends on where the money came from (a joint account or an individual account in the name of only one spouse, or whether the gift was made from community property or separate property).

Another tax implication: When the money in a custodial account is invested, there may be investment income, and each type is taxed differently:

Any realized gains or losses are reported on the child’s tax return. Losses can offset the child’s gains but cannot be used to reduce a parent’s taxable income.

Because the assets in the UGMA or UTMA account belong to the child, the “kiddie tax” may apply. For 2026, the first $1,350 of a child’s unearned income is tax-free, the next $1,350 is taxed at the child’s rate and any unearned income above $2,700 is taxed at the parent’s marginal rate – regardless of whether the income is reported on the child’s separate tax return or is included on the parents’ return. These thresholds are adjusted periodically, so it’s worth checking current IRS guidance when filing. If the kiddie tax applies, the child typically files Form 8615Opens overlay with their tax return. This form calculates how much of the child’s income is taxed at the parent’s rate.

How UGMA and UTMA accounts may affect financial aid

When it comes to financial aid, custodial accounts, regardless of whether they’re UGMA or UTMA, may affect how much aid a child qualifies for. This is because the assets in a custodial account are the child’s and they are reported as student assets on the FAFSA (Free Application for Federal Student Aid). Student assets are assessed at a rate of up to 20%, while parent assets are assessed at a much lower rate of 5.64%.

For example, let’s say your child has $10,000 in their UTMA account. Based on the FAFSA rate of 20% for student-owned assets, the FAFSA formula could reduce their aid eligibility by as much as $2,000. If that same $10,000 were held in a parent-owned brokerage account, the reduction in aid eligibility would be closer to $564 because the parent rate is 5.64%. That’s a difference of more than $1,400 from the same amount of money, simply based on who owns the account.

With this in mind, another education savings account, such as a 529 plan, may be the right move if you’re looking to save and invest for your child’s future education.

Pros and cons of UGMA and UTMA accounts

One of the biggest advantages of both UGMA and UTMA accounts is simplicity. They are generally easy to open, may not require the complexity or cost of establishing a trust, and allow for more flexible gifting without contribution limits. They also may provide an opportunity to introduce children to investing and financial responsibility over time.

There are trade-offs, however. Contributions are irrevocable, meaning you can’t take the assets back once you put them into the account. Another drawback is the potential impact on financial aid, since custodial accounts are considered student-owned assets on the FAFSA.

The bottom line

When exploring custodial accounts and other financial accounts, it can be helpful to talk things through with a financial professional as part of a complete financial plan for your child. Items to discuss might include the tax implications of the custodial account versus a 529 account, the potential effect on financial aid eligibility and whether other savings options may better align with the child’s overall goals.

Opening a custodial account is typically a straightforward process. Most banks and brokerage firms offer a custodial account. You will need basic information about the child and custodian, and you can begin funding the account once it is established.

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