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Uniform Gifts to Minors Ac (UGMA)

Posted on October 19, 2025October 20, 2025 by user

What is a UGMA account?

A UGMA (Uniform Gifts to Minors Act) account is a custodial account that lets an adult transfer cash and financial securities to a minor without creating a trust. The assets in the account are the legal property of the child, but a named custodian manages and invests them until the child reaches the age of majority set by state law.

How a UGMA account works

  • An adult (donor) opens the account in the child’s name and appoints a custodian (often a parent or grandparent, or a financial institution).
  • The custodian buys, sells, and manages permitted assets (cash, stocks, bonds, mutual funds, other securities) on behalf of the minor and must act in the child’s best interest.
  • Contributions are irrevocable gifts: once deposited, the assets belong to the minor and cannot be reclaimed by the donor.
  • There are generally no contribution limits to the account itself, but gifts may be subject to federal gift-tax rules.
  • When the minor reaches the state-determined age of majority, control of the account transfers to them and they can use the funds for any purpose.

Important: Custodians have a fiduciary duty to manage the account for the beneficiary’s best interest.

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Typical uses and limitations

  • Commonly used to fund education, but money can be spent on any expense that benefits the child.
  • Because the assets are owned by the child, they count on financial-aid applications and can reduce aid eligibility.
  • UGMA accounts are usually limited to publicly traded financial assets and generally cannot hold real estate, collectibles, or certain complex investments.

UGMA vs. UTMA

  • UTMA (Uniform Transfers to Minors Act) is an expanded version of UGMA used in many states.
  • Key difference: UTMA custodial accounts can hold a broader range of tangible and intangible property (e.g., real estate, artwork, intellectual property), while UGMA is typically limited to financial assets.
  • Both transfer ownership to the minor and require a custodian to manage assets until the transfer of control.

UGMA vs. 529 plans

  • UGMA: Flexible—funds can be used for any purpose, no withdrawal penalties, but no tax-advantaged growth and assets count toward financial-aid calculations.
  • 529 plan: Specifically for qualified education expenses; contributions grow tax-deferred and withdrawals for qualified education expenses are tax-free. Many states offer additional tax benefits. Contribution limits vary by state but tend to be high.
  • Choose UGMA for flexibility and simplicity; choose a 529 for tax-advantaged education savings and better financial-aid treatment in many cases.

Advantages

  • Simple and easy to set up through a bank or brokerage.
  • No account-level contribution or withdrawal limits.
  • Flexibility in how funds are used (not restricted to education).
  • Avoids the cost and complexity of a formal trust; ownership is clear—the child owns the assets.

Disadvantages

  • Irrevocable: gifts cannot be taken back.
  • Assets belong to the child and may reduce eligibility for financial aid.
  • No federal tax advantages specific to UGMA contributions (unlike some 529 plans).
  • Once the child reaches majority, they gain full control and can use funds as they wish, which may not align with the donor’s intended purpose.

Contribution limits and taxes

  • The UGMA account itself typically has no contribution caps, but gifts may be subject to federal gift-tax rules. For example, the annual gift tax exclusion was $18,000 per recipient in 2024 (amounts are adjusted periodically).
  • Investment income in the account is taxable to the child. The “kiddie tax” rules may apply, causing a portion (or all) of the child’s unearned income to be taxed at the parent’s rate depending on the child’s age and the amount of unearned income. Thresholds and rates change over time—check current IRS rules or consult a tax advisor.

How to open a UGMA account

  • Most banks, brokerage firms, and financial institutions offer UGMA/UTMA custodial accounts.
  • Anyone (family or friends) can contribute once the account exists, but contributors should understand that deposits are irrevocable gifts to the minor.

Bottom line

A UGMA custodial account is a straightforward way to transfer financial assets to a minor while letting a custodian manage them until the child reaches adulthood. It offers flexibility and simplicity but comes with important trade-offs: gifts are irrevocable, there are no specific tax advantages, and custodial assets can affect college financial aid. Consider your savings goals and consult a financial or tax professional to decide whether a UGMA, UTMA, 529 plan, or another vehicle is the best fit.

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