UGMA-UTMA Account: The Benefits of One

Planning for a child’s future is one of the most impactful actions a parent or guardian can take. Among the many financial tools available, UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts are particularly effective options. These custodial accounts enable parents, financial planners, and college savers to efficiently manage and grow savings for a young person’s future expenses, often with less complexity than other types of investment vehicles.

But how do they work, and what makes them such powerful savings tools? Whether you’re a parent eager to start saving for your child’s college education or a financial planner seeking practical options to recommend to clients, this guide will walk you through the key advantages of UGMA and UTMA accounts.

What Are UGMA and UTMA Accounts?

Before we discuss their benefits, it’s essential to understand what UGMA and UTMA accounts are and how they function.

UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts are custodial accounts designed to hold and manage assets on behalf of a minor until they reach the age of majority (typically 18 or 21, depending on your state of residence). Both accounts are established by an adult, usually a parent or guardian, who is responsible for managing the account until it transfers fully to the child.

Key Features of UGMA Accounts

• Assets Allowed: UGMA accounts primarily accept financial assets, such as stocks, bonds, mutual funds, and cash.
• Simple Setup: These accounts are straightforward to open at most financial institutions and are relatively easy to maintain.

Key Features of UTMA Accounts

• Assets Allowed: While UTMA accounts also accept financial assets, they provide more flexibility by allowing the inclusion of non-financial assets such as real estate, artworks, or patents.
• Control Over More Assets: Their expanded range makes them a preferred option for families looking to transfer diverse types of property to their child.

The Benefits of UGMA and UTMA Accounts

These accounts offer a range of advantages that make them an appealing option for parents, college savers, and financial planners.

1. Tax Benefits

One of the standout benefits of UGMA and UTMA accounts is their tax advantages, which can help parents maximize their savings for a child’s future. The income generated by the assets in these accounts is often taxed at the child’s lower tax rate—commonly referred to as the “kiddie tax” rule.

• The first $1,250 of unearned income is typically tax-free.
• The next $1,250 is taxed at the child’s low tax rate rather than the parent’s.
• Income over this threshold is taxed at the parent’s tax rate.

This setup can significantly reduce the overall tax burden for families and allow more of the account’s earnings to go toward the child’s future goals, such as education.

2. No Contribution Limits

Unlike 529 plans or Coverdell Education Savings Accounts, UGMA and UTMA accounts do not have annual contribution restrictions. Parents, relatives, and other contributors can deposit as much as they wish into the account, providing greater flexibility for families with varying savings goals.

It’s worth noting that contributions to UGMA and UTMA accounts are subject to the federal annual gift tax exclusion limit, which, as of 2023, is $17,000 per year, per individual (or $34,000 for a married couple gifting jointly). Contributions beyond this limit may require filing a gift tax return.

3. Flexibility in Usage

Unlike other savings vehicles that are exclusively tied to specific uses (e.g., qualified educational expenses for 529 plans), UGMA and UTMA accounts are highly flexible. Once the child becomes the account owner, they can use the funds for a broad range of purposes, from tuition and rent to starting a business or funding a passion project.

This flexibility can be highly attractive to families who want to save for their child’s future without being restricted to using the funds solely for education or other predefined expenses.

4. Encourages Financial Responsibility

Because these accounts eventually transfer ownership to the child, they serve as a hands-on way to teach financial literacy and responsibility. When a young adult assumes full control over the account, they’re tasked with managing real assets independently—a valuable life skill that can set them up for financial success.

For parents, it’s a golden opportunity to talk with their children about budgeting, investing, and long-term planning before the transfer occurs.

5. Simplified Estate Planning

UGMA and UTMA accounts also help parents and financial planners streamline estate planning. Assets placed in these accounts aren’t tied up in complex trusts or wills and are relatively easy to set up and manage.

By transferring assets to these accounts during their lifetimes, parents can reduce the size of their taxable estate while ensuring assets go directly to their children in a straightforward manner.

Factors to Consider Before Opening a UGMA or UTMA Account

While UGMA and UTMA accounts offer many benefits, there are a few potential drawbacks to keep in mind.

1. Lack of Parental Control After Transfer

Once the child gains ownership of the account at the age of majority, they have full control over how the funds are spent. For parents who worry about impulsive spending, this may be a concern.

2. Impact on Financial Aid Eligibility

Funds in custodial accounts can impact a child’s eligibility for financial aid. According to federal financial aid formulas, assets held in an UGMA or UTMA account are considered the student’s assets and therefore may reduce the amount of need-based aid they receive.

3. Tax Considerations for Earned Income

While the kiddie tax rules offer advantages for unearned income, earned income (such as wages) is taxed differently. Families should carefully consider all potential tax implications when managing these accounts.

Is a UGMA or UTMA Account Right for You?

For families who want to provide for a child’s future while enjoying flexibility and tax advantages, UGMA and UTMA accounts can be an excellent option.

However, they’re not the perfect fit for everyone. If the lack of parental control after transfer or the impact on financial aid is a concern, alternative savings methods such as 529 plans, trusts, or Roth IRAs for children might be better suited to your needs. Consulting with a financial advisor can help you weigh all these options carefully.

Empower Your Family’s Financial Future

Saving for a child’s future is one of the greatest gifts a parent or guardian can give. UGMA and UTMA accounts provide powerful tools to build wealth for young people in a way that’s flexible, tax-efficient, and easy to manage.