UTMA accounts provide a way to gift money to minor children. Contributing funds to UTMA accounts constitutes an irrevocable gift. Once you gift the funds, they must be managed for the benefit of the minor and you cannot change the beneficiary. However, there is a lot of flexibility with this type of account. The custodian (usually Mom or Dad) can decide what is in the best interest of the minor (little Jack or Jill).
According to Vanguard’s website, these accounts “allow you to save on behalf of a child for education or any other purpose that benefits the child (other than parental obligations such as food, clothing, and shelter).”
UTMA stands for Uniform Transfer to Minors Act. For simplicity sake, we’ll just refer to them as UTMAs. There are also Uniform Gift to Minors Act accounts or UGMAs. These accounts are very similar and the terms are often used interchangeably. Not all states have adopted the uniform laws that govern UTMAs and UGMAs.
In addition, there are some differences in the types of assets that can be gifted according to the uniform laws. To keep things simple, both UTMA accounts and UGMAs allow for contributions of cash and securities.
How are UTMA accounts established?
Most financial institutions will allow the funding of these types of accounts. It’s as simple as filling out new account paperwork. This could be at a local bank or a large financial institution like Charles Schwab, Fidelity, E-Trade etc. No trusts or special estate planning documents are required.
When you establish the account you must specify the age at which the minor will gain control of the funds. This is the “age of trust termination.” It’s important to note that this is not the same as “age of majority.” States laws can vary with both the “age of trust termination” and “age of majority.”
Let’s assume you are in California for an example. In California, the “age of majority” is 18 while the “age of trust termination” is 21. As a result, custodians can establish UTMA accounts for a minor and specify that they wait until age 21 to gain control of the funds.
Once the account is funded, it is common to invest the funds in stocks, bonds, mutual funds etc. However, it is critical to identify the time horizon to appropriately invest the funds. For example, you wouldn’t want to invest 100% of the portfolio in stocks if you planned to withdraw funds for the minor’s benefit in two years. The flip side of that is making sure you’re aren’t too conservative with the funds if you will be investing for more than 10 years.
How are UTMA accounts taxed?
UTMA accounts are taxable accounts. This is in contrast to IRAs, Roth IRAs, 529s, and HSA plans. You can expect to receive a 1099 each year that details dividends, interest, and realized capital gains and losses. Income and capital gains in UTMA accounts are attributable to the minor up to a certain limit. This is where things become problematic.
Long ago, tax laws were established to prevent high income and high tax bracket parents from shifting assets to minors to take advantage of the child’s lower tax rate. These tax laws became known as the “Kiddie Tax.”
For 2025, the limit for unearned income for minors is $2,700. Amounts above that are taxed at the rate applicable to trusts and estates. These tax rates vary depending on the amount. Regardless, there is very little tax advantage to establishing UTMA accounts.
Planning for college with UTMA accounts:
Planning for college is complicated enough. Throw a long term education savings plan into the mix and the proverbial can of worms is now open. From 529s to Coverdell ESAs to UTMA accounts and UGMAs, there is plenty of confusion to go around.
A good place to start is eliminating the types of accounts that are not specifically geared toward education. This leads us to the UTMA accounts.
Many parents lean toward UTMAs because they have an out if expenses come up prior to college that could benefit their child. The flexibility of UTMA accounts make them attractive. However, it reminds me of the old expression about having your cake and eating it too. While the desire for flexibility is understandable, the decision to go with a UTMA can have serious drawbacks.
As discussed earlier, funds in UTMAs are taxed at the minor’s rate up to a certain limit and then taxable at the rate applicable to trusts and estates. They are also subject to capital gains tax treatment when investments are sold to eventually pay for education expenses.
Because UTMAs are taxable accounts, investment returns will be limited compared to a 529 College Savings Plan which allows tax free growth. This is the same concept of investing in a Roth IRA for retirement versus saving for retirement in a regular taxable investment account.
Another important drawback of UTMAs involves how the funds are treated when applying for financial aid. UTMA assets are considered to be owned by the minor (student) and can reduce financial aid eligibility. This is in contrast to funds held within a 529 College Savings Plan. 529s are considered to be a parental asset and are treated more favorably when determining eligibility.
Other considerations for UTMA accounts:
Many of these accounts are opened when children are very young. Sometimes they are established at birth. UTMA accounts are usually opened with the best intentions of a parent or a grandparent. The desire to invest funds that can help a child’s future is a noble one.
These funds can be used to help pay for college, down payment on a home, or even starting a new business. However, once the child has reached the age of trust termination, the funds can be used for anything. I mean, anything.
There is the very real possibility that a substantial amount of money can accumulate over 15 to 20 years. Will the 18 or 21 year old handle the money responsibly when they gain control of the funds? Some will and other won’t. It is simply impossible to predict the future and there are few options in place to ensure the funds are spent prudently. We wouldn’t want to hand a high credit limit credit card over to a young person. The same could be said for large wad of cash.
Lastly, it isn’t always clear what the parent can spend the money on while the child is a minor. In general, the funds must be spent “for the use and benefit of the minor.” Because that definition is a little murky, it can be difficult to determine if you operating under the rules.
Do you really want to consult an attorney every time you make a withdrawal? Also, each financial institution may have a different process in place designed to protect the minor from misuse of funds.
A UTMA (Uniform Transfer to Minors Act) account is a custodial account that allows adults to gift money or assets to a minor. The gift is irrevocable, meaning once contributed, the assets belong to the child. A custodian (often a parent) manages the account until the child reaches the age of termination set by state law, at which point the child gains full control. Funds can be used for any expense that benefits the child.
Both UTMA and UGMA (Uniform Gift to Minors Act) accounts let adults transfer assets to children. The main difference is in what can be gifted: UGMA accounts generally allow only cash and securities, while UTMA accounts permit a wider range of assets, including real estate and certain property. However, not all states have adopted UTMA laws, so availability may vary.
UTMA accounts can be used for education costs, but they are often less efficient than 529 College Savings Plans. Unlike 529s, UTMAs are taxable accounts, so earnings are subject to the “kiddie tax.” Additionally, UTMA assets are counted as the child’s property when applying for financial aid, which can reduce eligibility for need-based assistance. Families who prioritize tax advantages and financial aid may prefer 529 plans.
UTMA accounts generate a Form 1099 each year to report dividends, interest, and capital gains. The first $2,700 of unearned income (for 2025) is taxed at the child’s rate. Income above that is taxed at trust and estate tax rates, which are often higher. This system, known as the kiddie tax, was designed to prevent parents from shifting investments into their child’s name to avoid higher tax brackets.
Pros:
Flexibility in how funds can be used for the child’s benefit.
Easy to open at banks or investment firms without legal documents or trusts.
Can accept a wide variety of assets, depending on state laws.
Cons:
Earnings are taxable, unlike 529s which grow tax-free.
Funds count as the child’s asset for financial aid, reducing eligibility.
Once the child reaches the termination age (often 18–21), they gain full control and can spend the money however they want.
Summary
UTMA accounts (Uniform Transfer to Minors Act accounts) are custodial accounts that allow adults to gift money or assets to a child. Once contributed, the assets become the child’s property and are managed by a custodian until the child reaches the legal termination age. UTMAs offer flexibility since funds can be used for education, housing, or other expenses that benefit the child, but they also come with tax considerations under the kiddie tax rules and may reduce financial aid eligibility. Families often weigh UTMAs against alternatives like 529 College Savings Plans to decide which option best supports long-term goals.
Conclusion
This is not a comprehensive description of UTMAs or 529 College Savings Plans but it is an important place to start. I’m also not suggesting that UTMA accounts are bad. They’re just not the best fit for a college savings plan. Recognizing that there are special accounts designated for specific purposes can help you stay on track.
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