UTMA and UGMA Basics
A Parenting Guide to Financial Literacy
What is a UTMA/UGMA account?
The Uniform Transfers to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA) are custodial accounts allowing you to gift, save, and invest money for a minor without establishing a trust. Both accounts are virtually the same, the only difference is a UGMA can hold financial assets (cash, stocks, bonds, etc) and a UTMA can hold the same as well as physical assets (property, real estate, etc). These assets are then transferred to a minor whenever they reach the age of majority.
Why are these accounts so special?
Firstly, UTMA/UGMA accounts are custodial accounts, which differ from trust funds by being simpler, cheaper, and most importantly, more flexible. These custodial accounts allow parents or the custodian to have control over the financial assets in these accounts. They are allowed to manage the accounts until the minor/s are of age and fully responsible to take over the account. Any assets placed into these accounts also cannot be reversed, with the money being allowed to be used for the benefit of the child only.
Benefits of UTMA/UGMA accounts
Compared to 529 and custodial IRA accounts, there are no restrictions on the amount of money you can gift/contribute to your child’s UTMA/UGMA accounts. With the 2022 federal gift-tax, one parent is allowed to gift a child anything under $16,000 annually, without paying any tax on the exchange. If the parents/custodians are married, they can file jointly and double the limit, being able to each gift $16,000 for a combined total of $32,000 to one child, tax-free.
The flexibility in UTMA/UGMA accounts allows for the money to be used/spent in several ways. With 529 accounts limited to educational expenses and custodial IRAs being limited to retirement, UTMA/UGMA accounts can be used freely towards anything once the minor is eligible.
Instead of being restricted to higher-education expenses through a 529, UTMA/UGMA accounts can be used for any expenses for the child such as (but not limited to) housing, transportation, technology, etc.
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.