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Two types of minor custodial accounts exist: the Uniform Transfers to Minors Act (UTMA) and the Uniform Gift to Minors Act (UGMA). A minor custodial account is designed to hold and protect assets for minor beneficiaries. These accounts are set up by a donor (usually a child’s parent/s) so that the donor, another adult, or an institution manages money for a minor child. These accounts transfer wealth without the cost and complication of establishing a formal trust.[1],[2]

Key aspects of both accounts:

  • Money cannot be returned after it is placed in a minor custodial account. This is an irreversible gift.[3]
Updated For 2024: Individual taxpayers are allowed to make gifts of up to $18,000 per gift recipient in 2024 without using any of their lifetime estate and gift tax exclusion. For married couples, this amount doubles to $36,000 per recipient.[4]
  • Minors will have complete control of the money when they reach maturity. There are no stipulations that they need to use it for education or anything else. They can spend as they please.[5]
  • Account money can be withdrawn for the needs of the minor that the account was set up for, but the child does not have full access to the funds until they reach adulthood- the account and the state will determine the age of maturity. 1,2, 3
  • There is a fiduciary responsibility of the custodian, or if they designate another person or institution, they will act in the interests of the receiver of the account, not the donor. The custodian must also comply with their state’s UTMA/UGMA statutes. 1,2, 3
  • These accounts can be a great way to teach children about investing. 1,2, 3
  • There are no income or contribution limits. 1,2, 3
  • There are no withdrawal penalties. 1,2, 3
  • There are no required distributions at any point. 1,2, 3
Updated For 2024: Any income the account earns is taxed to the child. However, children are taxed at a lower rate than adults- this is known as a “kiddie tax.” The first $1,250 of earnings is tax-free. The second $1,250 is taxed at the child’s tax rate. Over $2,500 is taxed at the parents’ tax rate. [6]
  • With all investment accounts, you expose some or all your invested money to loss for the chance to earn a higher profit. Investment gains hinge on an ongoing and long-term investment strategy that uses your risk tolerance and diversification to mitigate some risks. Even with these in place, you are exposing your money to loss.
  • Fees vary from institution to institution. It is essential to understand how much you are paying in fees.
  • When the child reaches the “age of maturity,” the account transfers to the beneficiary’s name. After that, they must re-register the account as a non-qualified brokerage account or an IRA or cash out the account and pay the associated fees and taxes. 4
  • These accounts are counted on financial aid applications as income for the child. 1,2, 3
  • These accounts might not be the best option for large wealth transfers. Their tax sheltering ability is limited. You must speak with a CPA and Financial Planner to see how these accounts could work with an estate planning strategy for your personal situation. 3

Key aspects of UTMA Accounts: [7],[8]

  • Uniform Transfers to Minors Act (UTMA) minor custodial accounts can hold stocks, bonds, mutual fund shares, real estate deeds, intellectual property, fine art, precious metals, and shares in a family-limited partnership.
  • UTMA offers a broader holding capability than UGMA. This broader holding capability of UTMA accounts can provide more flexibility and investment opportunities for the account holder if needed, but it also comes with additional responsibilities and tax implications.
  • The age of maturity is up to 18.

Key aspects of UGMA Accounts: 5,6

  • Uniform Gift to Minors Act (UGMA) minor custodial accounts can hold purely financial products such as cash, stocks, mutual funds, bonds, other securitized instruments, and insurance policies.
  • UGMA accounts offer a more extended maturity date, which might be helpful to beneficiaries who know they will be using its money for undergraduate and post-graduate school to elongate the ‘kiddie tax” rate for as long as possible.
  • The age of maturity is up to 25. If the beneficiary is not in school, this maturity date is lower and depends on state statutes.

If you would like to explore additional ways to help prepare a child for college and beyond, Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here.  To sign up for our weekly newsletter with the latest economic news, click here











This material has been prepared for informational purposes. *To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances.