UGMA vs UTMA: What's the Difference?

This content has been reviewed and edited by an Investment Advisor Representative working for Global Predictions, an SEC-registered Investment Advisor.

When it comes to saving for your child’s future, there are a few options that allow you to set money aside while retaining some control over how the funds are managed until your child reaches adulthood. Two popular custodial accounts for minors are UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act). If you’re considering one of these accounts, understanding their key differences can help you decide which one is the better fit for your goals. Here’s a breakdown of UGMA and UTMA accounts, their differences, and how they might benefit you and your child.

Key Takeaways

• Asset Flexibility: UTMA accounts allow for a wider range of assets compared to UGMA, which is limited to financial investments.
• Tax Implications: Both accounts may offer tax advantages, with income often taxed at the child’s rate, though certain limits may apply.
• Control Upon Adulthood: Children gain full control of both types of accounts at the age of majority, so it’s essential to consider their financial maturity.
• Financial Aid Impact: Assets in these accounts may affect financial aid eligibility, as they’re considered the child’s property.

What Are UGMA and UTMA Accounts?

Both UGMA and UTMA are types of custodial accounts that allow assets to be transferred to a minor without needing to establish a formal trust. These accounts are set up in a child's name, with an adult — often a parent or guardian — acting as the custodian until the child reaches a certain age, at which point they gain full control of the account.

• UGMA Account (Uniform Gifts to Minors Act): This account allows you to gift financial assets, such as stocks, bonds, or cash, to a minor. It’s a straightforward way to transfer assets without setting up a complex trust.
• UTMA Account (Uniform Transfers to Minors Act): UTMA accounts are similar to UGMA but are more flexible in what you can contribute. In addition to financial assets, UTMA accounts can hold physical assets like real estate, jewelry, or art.

Key Differences Between UGMA and UTMA

To help clarify the choice between UGMA and UTMA accounts, here are some primary distinctions:

Types of Assets Allowed

• UGMA Accounts: Only allow financial assets like cash, stocks, bonds, or mutual funds. UGMA accounts are simpler as they’re focused on traditional investments.
• UTMA Accounts: Offer more flexibility, allowing a wider range of assets, including real estate, vehicles, and collectibles. This can be useful if you want to transfer diverse types of assets.

Hypothetical Example: If you want to gift your child some shares of a stock, a UGMA account will work just fine. However, if you want to include a piece of land or other valuable assets, a UTMA account might be the better choice.

Flexibility and Restrictions

• UGMA: Has fewer options in asset types but is often simpler in terms of taxation and asset management.
• UTMA: Allows for a more diverse set of assets, which can be advantageous for long-term wealth building.

Hypothetical Scenario: Imagine you have valuable antiques and investment accounts you want to gift to your child. With an UTMA account, you could include these antiques along with financial investments. An UGMA account, however, would limit you to financial assets only.

Control Over Funds

With both UGMA and UTMA accounts, the child gains full control over the assets once they reach the age of majority, typically between 18 to 21 years old, depending on the state. Once the child has access, they can use the funds however they choose, which may be a concern for parents wanting to ensure responsible spending.

• Important Consideration: Since the child gains full control at adulthood, parents should consider their child’s maturity level and readiness to manage funds responsibly. Unlike a trust, there are no conditions preventing the beneficiary from using the funds at their discretion once they come of age.
• For Extended Control: Parents who want longer-term control of assets may consider setting up a trust, which allows for conditional distributions and extended management beyond the age of 18 or 21. Trusts can provide more control over how and when the funds are accessed, often with the help of a trustee.

Tax Implications

Both UGMA and UTMA accounts offer potential tax advantages, but assets in these accounts are treated as the minor’s, which may impact financial aid eligibility for college. Income generated by assets in these accounts may be taxed at the child’s rate, which can be beneficial since children generally fall into a lower tax bracket.

What Is the Kiddie Tax?

The “kiddie tax” is a tax rule that applies to unearned income of minors, like dividends and investment gains, to prevent large amounts of income from being taxed at a child’s low rate. If a child’s unearned income — such as from investments in a UGMA or UTMA account — exceeds a certain limit, the excess amount may be taxed at the parent’s tax rate instead of the child’s. This rule is designed to ensure higher incomes are taxed fairly.

• Example of Tax Impact: Imagine you have a UTMA account with $50,000, generating dividends that are taxed as the minor’s income. Since children often fall into lower tax brackets, this could mean a reduced tax bill. However, it’s important to know that if the income exceeds the annual kiddie tax threshold, anything above that limit may be taxed at the parent’s rate. Additionally, the account’s status as the child’s asset can affect eligibility for financial aid.

For more information about taxation on custodial accounts, check the following resources:

• IRS Topic No. 553 - Tax on a Child's Investment and Other Unearned Income (Kiddie Tax): Provides details on how unearned income, like investment gains in custodial accounts, is taxed when the child’s income exceeds certain limits.
• IRS Publication 929 - Tax Rules for Children and Dependents: Covers the specifics of how custodial accounts and other investments are treated for tax purposes.

Financial Planning Goals: How UGMA and UTMA Can Help

UGMA and UTMA accounts can support a variety of financial goals for your child, whether short-term or long-term:

• Education Savings: These accounts can help fund education costs, from primary school expenses to college tuition. However, keep in mind that assets in these accounts count as the child’s, which may impact financial aid eligibility.
• Future Investments: UTMA accounts, with their flexibility in asset types, are advantageous if you plan to transfer diverse assets, such as real estate, which may appreciate over time and contribute to your child’s financial foundation.
• Major Life Purchases: UGMA and UTMA accounts can help build savings for significant future expenses, such as a down payment on a home, a wedding, or starting a business. Having access to these funds at adulthood provides the beneficiary with a financial head start for these goals.

Pros and Cons of UGMA vs. UTMA

Here’s a quick overview of the advantages and disadvantages of each account type:

UGMA

• Pros: Simpler structure; easier tax management; focused on financial assets.
• Cons: Limited to cash and securities; fewer asset choices.

UTMA

• Pros: Greater asset variety, including real estate and collectibles; advantageous for long-term wealth building.
• Cons: More complex tax considerations; may complicate financial aid eligibility.