What are UGMAs and UTMAs?
UGMA, or the Uniform Gifts to Minors Act, and UTMA, or the Uniform Transfers to Minors Act, are legislative acts that allow for the creation of two types of accounts that permit minors (people under age 18) to own securities (a.k.a. investments). UGMA accounts allow for the ownership of securities such as stocks and bonds, while UTMA accounts allow the minor to also own other types of hard assets, royalties, and patents as well.
Each account must have a custodian or trustee (in other words, a keeper or guardian) who has a fiduciary duty to manage the account in the beneficiary’s best interest. The beneficiary, of course, is the minor. (Under the U.S. legal system, a fiduciary duty is the legal term describing a relationship between two parties that obligates one to act solely in the best interest of the other.)
The custodian of the account can be a parent but doesn't necessarily need to be. The custodian can also be the account donor (the person who opens the account). The beneficiary is the minor for whom the account is managed.
Put simply, UTMAs and UGMAs allow you to give money to a minor while maintaining control over the money until the child reaches age 19.*
How do taxes apply to UGMAs and UTMAs?
Contributions to both UTMAs and UGMAs are irrevocable. This means that the minor owns the assets indefinitely — the account donor or custodian cannot take them back.
Because assets placed in an UGMA or UTMA account are technically owned by the child, at least a portion of the earnings are generally taxed at the child’s — usually lower — tax rate, rather than the parent’s rate. For some families, this savings can be significant.
What are the pros and cons of UGMA and UTMA accounts?
The primary benefit of using UGMA and UTMA accounts is that they allow parents or other adults to give assets to minors in a tax-advantaged manner while maintaining some degree of control over how those assets are ultimately spent. These accounts can be opened through any financial institution without preparing trust documents through an attorney.
Critically, the funds can be used for any purpose (doesn’t have to be college!) once the minor reaches the age of majority, which is generally 18 depending on your state.
Caution should be taken if the intended purpose of the UGMA or UTMA is saving for college, because these accounts are treated as assets of the minor when filing some types of financial aid, which could limit how much other aid you or your child may receive. 529 accounts, on the other hand, are treated as assets of the parents and, therefore, are generally not counted in calculations for financial need.
Are UGMA/UTMAs right for me?
UGMA and UTMA accounts can provide a way for minors to save, invest, and hold assets. Your family’s specific needs will determine which type of account is most appropriate.
*There are some limited circumstances in which UGMA and UTMA accounts can be maintained beyond age 19.