UGMA & UTMA Custodial Accounts: Benefits, Drawbacks, and Key Considerations

If you’re looking to set aside money for a child’s future—whether for education, a first car, or a financial head start—custodial accounts offer a straightforward option. Two common types are UGMA and UTMA accounts, named after the federal legislation that created them. Understanding how these accounts work, along with their advantages and disadvantages, can help you determine whether they’re the right choice for your family.

What Are UGMA and UTMA Accounts?

UGMA (Uniform Gifts to Minors Act) accounts were established in 1956 as a way to transfer assets to minors without the expense and complexity of setting up a formal trust. UGMA allows adults to gift cash and financial securities—such as stocks, bonds, and mutual funds—to a minor, with an adult custodian managing the account until the child reaches the age of majority.

UTMA (Uniform Transfers to Minors Act) was established in 1986 and expanded upon UGMA by allowing a broader range of assets.1 In addition to cash and securities, UTMA accounts can hold real estate, vehicles, artwork, intellectual property, and other tangible property. This makes UTMA particularly useful for families with diverse assets they wish to transfer to the next generation.

Both account types function similarly: an adult custodian manages the assets on behalf of the minor beneficiary until the child reaches the age of majority as determined by state law—typically between 18 and 25. The custodian has a fiduciary duty to act in the best interests of the child and must manage the assets using the standard of care a prudent person would apply when handling another person’s property.2 At the age of majority, the assets transfer fully to the beneficiary, who gains complete control over how the funds are used.

All 50 states recognize UGMA accounts, while UTMA has been adopted by all states except South Carolina and Vermont, which continue to use only UGMA.

Key Differences Between UGMA and UTMA

Advantages of UGMA and UTMA Accounts

Flexibility in Use

Unlike 529 college savings plans, which restrict withdrawals to qualified education expenses, custodial accounts have no use restrictions. Once the beneficiary reaches the age of majority, they can use the funds for any purpose—college tuition, a down payment on a home, starting a business, or travel. During the custodianship, the custodian can also make withdrawals for expenses that benefit the child, such as summer camp, music lessons, or educational materials.

No Contribution Limits

There are no annual contribution limits for UGMA or UTMA accounts, unlike Coverdell Education Savings Accounts (which cap contributions at $2,000 per year). Anyone—parents, grandparents, relatives, or friends—can contribute to the account. However, contributions exceeding $19,000 per person ($38,000 for married couples) in 2025 may trigger federal gift tax reporting requirements, though no tax is typically owed unless you exceed your lifetime gift tax exemption.3

Simpler and Less Expensive Than Trusts

Custodial accounts offer a practical alternative to formal trusts for transferring assets to minors. Opening an account is straightforward and can often be done online at most brokerages with no minimum deposit or setup fees. This makes them accessible for families who want to begin building wealth for a child without incurring legal costs.

Favorable Tax Treatment on Modest Earnings

Investment earnings in custodial accounts receive some tax advantages under the “kiddie tax” rules. For 2025, the first $1,350 of a child’s unearned income is tax-free, and the next $1,350 is taxed at the child’s rate (often 10%). Only earnings exceeding $2,700 are taxed at the parent’s marginal rate.4 For accounts with modest balances, this can provide meaningful tax savings compared to holding assets in the parent’s name.

Broad Investment Options

Custodial brokerage accounts typically offer access to a wide range of investments, including individual stocks, bonds, mutual funds, ETFs, and CDs. This flexibility allows custodians to tailor investment strategies to the child’s time horizon and risk tolerance—a longer time horizon generally supports more aggressive growth strategies.

Disadvantages of UGMA and UTMA Accounts

Irrevocable Transfers

Once you contribute assets to a custodial account, the transfer is permanent and irrevocable. The assets legally belong to the child, and you cannot reclaim them or change the beneficiary. If circumstances change—for example, if one child receives a full scholarship while another needs financial help—you cannot redirect the funds. This inflexibility stands in contrast to 529 plans, where beneficiaries can be changed.

Loss of Control at Age of Majority

When the beneficiary reaches the age of majority (18 to 25, depending on state law), they gain complete control of the account and can use the funds for any purpose. The original contributor’s intentions no longer matter—whether the funds were meant for college or another purpose, the young adult can spend them on a vacation, a car, or anything else they choose. For families concerned about financial maturity, this automatic transfer of control can be worrisome.

Significant Impact on Financial Aid Eligibility

Perhaps the most significant drawback for college-bound students is how custodial accounts affect financial aid. Because UGMA and UTMA accounts are legally owned by the child, they are reported as student assets on the FAFSA.7 The current formula assesses student assets at 20% of their value when calculating the Student Aid Index (SAI), meaning $10,000 in a custodial account could increase the SAI by $2,000 and reduce financial aid eligibility accordingly.6

By comparison, parent-owned assets (including parent-owned 529 plans) are assessed at a maximum of only 5.64%.7 This stark difference can substantially reduce a student’s eligibility for need-based grants and scholarships.

Kiddie Tax on Larger Accounts

While the kiddie tax provides favorable treatment for modest investment earnings, larger accounts can generate enough income to trigger taxation at the parent’s higher marginal rate.7 An account generating $5,000 or more in annual dividends and capital gains would see a significant portion taxed at the parent’s rate, potentially negating much of the tax-shifting benefit these accounts were designed to provide.

Annual Tax Reporting Requirements

Unlike 529 plans, where earnings grow tax-deferred, custodial accounts generate taxable income each year. If the child’s unearned income exceeds $1,350, a tax return must be filed. Parents can elect to report the income on their own return using IRS Form 8814, or the child can file a separate return using Form 8615.8 Either way, this creates an annual administrative burden.

2025 Tax Treatment Summary

2026 Tax Treatment Summary

For 2026, the IRS has kept the kiddie tax thresholds unchanged from 2025. The same income brackets and tax treatment apply:

Age of Majority and Account Termination

The age at which a beneficiary gains control of custodial account assets varies by state and account type. Most states set the age at 18 or 21, though some allow the custodianship to extend to 25 if specified when the account is established.9 States with flexible age ranges include Alaska, California, Nevada, Oregon, Pennsylvania, and Tennessee.10

Notably, in Florida and Virginia, even if a custodian selects age 25 for termination, the beneficiary can demand distribution of assets upon turning 21.11 This nuance is important for families planning to extend custodianship in these states.

UGMA/UTMA vs. 529 College Savings Plans

For families specifically focused on education savings, 529 plans often provide advantages over custodial accounts. The earnings in 529 plans grow tax-deferred and can be withdrawn tax-free for qualified education expenses.3 Parent-owned 529 plans are assessed at only up to 5.64% on the FAFSA versus 20% for student-owned custodial accounts. Additionally, 529 plan owners retain control of the funds and can change beneficiaries if needed.

However, 529 plans restrict withdrawals to qualified education expenses; non-qualified withdrawals incur a 10% penalty plus income tax on earnings. For families who want spending flexibility or anticipate the child may not attend college, custodial accounts may be more appropriate.

One strategy combines both approaches: families can convert custodial account assets to a custodial 529 plan. While this triggers capital gains tax on the liquidation, the resulting custodial 529 is treated as a parent asset for FAFSA purposes, potentially improving financial aid eligibility.12 

However, custodial 529 accounts are treated as UTMA accounts once the child reaches the age of majority. The beneficiary gains full control, and the custodian must transfer the account to them. Funds must still be used for qualified education expenses to avoid income tax and penalties on the earnings. 

Key Details on Custodial 529 Accounts

• Control Shift: While the custodian manages the account until the child reaches the age of majority (usually 18 or 21, depending on state law), they lose control at that time.
• Irrevocable Restrictions: Unlike a standard 529, a custodial 529 cannot change the beneficiary.
• Fund Usage: The funds must be used for qualified education expenses for the benefit of the child.
• Transfer of Responsibility: Once the child reaches the age of majority, the custodian is required to transfer the account to the beneficiary. 

Custodian Fiduciary Duties

Serving as a custodian for a UGMA or UTMA account is not merely a matter of holding assets—it is a legal fiduciary role with specific obligations enforceable by law. Custodians who fail to meet these standards can be held personally liable to the beneficiary.

The Prudent Investor Standard

Custodians must manage the account’s assets using the “prudent investor” standard of care. This legal standard requires custodians to exercise the care, skill, and caution that a prudent person would use when investing property for the benefit of another.12 Speculative or high-risk investments that might be acceptable in a personal brokerage account are generally inappropriate under this standard. Courts have found custodians liable for breaching their duty when they concentrated assets in a single volatile investment rather than maintaining appropriate diversification.13

Using Funds Solely for the Minor’s Benefit

Every expenditure from a custodial account must demonstrably benefit the minor. The custodian cannot use the assets for their own benefit, commingle them with personal funds, or engage in any form of self-dealing.1 Appropriate uses include educational expenses beyond basic schooling, extracurricular activities, summer camps, specialized equipment, private tutoring, and other similar expenses. The flexibility of the “benefit of the minor” standard allows for varied uses, but the benefit to the child must be clear and documentable.

Prohibition on Funding Parental Support Obligations

One of the most important restrictions on custodial account spending is that funds cannot be used to pay for expenses that a parent is legally obligated to provide. This prohibition exists because using the child’s money for basic necessities effectively benefits the parent rather than the child.14 Prohibited expenses typically include basic food and shelter, routine clothing, and standard medical care. Using custodial funds for these purposes can constitute a breach of fiduciary duty and may result in the custodian being required to reimburse the account.15

Record-Keeping Obligations

Custodians must maintain detailed records of all transactions throughout the life of the account, including income earned, investments made, and expenditures incurred.15 This documentation serves multiple purposes: it facilitates proper tax reporting, demonstrates that expenditures adhered to the “benefit of the minor” standard, and protects the custodian from potential accusations of mismanagement. The beneficiary has the legal right to demand a full accounting of all custodial activities, and courts can compel the custodian to produce these records even decades after an account was established.

Consequences of Failing to Transfer Assets at Age of Majority

When a beneficiary reaches the age of majority specified by state law, the custodian is legally required to transfer control of the account assets to them. Failing to do so—whether intentionally or through neglect—can result in serious legal and financial consequences for the custodian.

Breach of Fiduciary Duty

Custodians have a fiduciary duty to act in the best interests of the beneficiary and to transfer the assets when legally required.2 Refusing to transfer assets, failing to inform the beneficiary of the account’s existence, or continuing to control the funds after the custodianship terminates constitutes a breach of this duty. Courts have consistently held custodians liable for such breaches, even when the custodian believed they were protecting the beneficiary from poor financial decisions.16

Legal Action by the Beneficiary

Once a beneficiary reaches the age of majority, they can legally compel the custodian to transfer the funds. If the custodian refuses, the beneficiary may file a lawsuit seeking an accounting of all transactions and the immediate transfer of assets. Courts have broad discretion in fashioning remedies, which may include ordering the transfer of all remaining assets plus interest, damages for any losses resulting from the custodian’s mismanagement, and in some states, attorney’s fees.17

Financial Institution Restrictions

Many financial institutions have systems to track when beneficiaries reach the age of majority and will restrict the custodian’s access to the account once that date passes.4 FINRA has issued guidance requiring member firms to monitor custodianship termination dates and has found violations where firms permitted custodians to continue making transactions after the custodianship legally ended.5 If an account becomes restricted due to delayed transfer, the restrictions typically remain until the custodian formally transfers ownership to the beneficiary.

Record-Keeping Requirements

Custodians are required to maintain detailed records of all transactions throughout the life of the account.15 Even decades after an account was established, the beneficiary can demand a full accounting, and courts can compel the custodian to produce these records. Failure to maintain adequate documentation can itself constitute a breach of fiduciary duty and complicate any legal defense the custodian might raise.

No Legal Mechanism to Delay Transfer

Importantly, there is no legal mechanism for a custodian to unilaterally extend the custodianship or delay the transfer simply because they believe the beneficiary is not ready.16 The transfer is mandatory regardless of the beneficiary’s financial maturity or the custodian’s intentions. Some custodians attempt to transfer assets into a trust to delay distribution, but this approach carries legal risks—if challenged, courts would likely order immediate termination of the trust and transfer of assets to the beneficiary.18

The Role of Financial Advisors and Broker-Dealers

While the primary fiduciary duty for custodial accounts rests with the custodian, financial advisors and their firms have distinct regulatory obligations regarding UGMA and UTMA accounts—particularly at the point of termination.

Regulatory Requirements Under FINRA Rules

FINRA Rule 2090 (“Know Your Customer”) requires member firms to use reasonable diligence to determine the essential facts about each customer, including the authority of any person acting on behalf of a customer.5 The termination of a custodianship represents an essential fact about the account that firms must track. FINRA Rule 3110 (Supervision) further requires firms to establish and maintain supervisory systems reasonably designed to achieve compliance with applicable securities laws and regulations.

Monitoring and Notification Obligations

FINRA expects member firms to implement systems that track custodianship termination dates from account inception, often using automated tools that provide alerts when beneficiaries approach the age of majority.19 Effective supervisory systems include procedures for representatives to communicate with custodians—and for custodians to communicate with beneficiaries—about the upcoming transfer of assets. Firms should verify whether the custodian has authority to manage assets after termination and document any post-termination relationship, such as a power of attorney.

Account Restrictions After Termination

Once the beneficiary reaches the age of termination, many financial institutions restrict the custodian’s access to the account—preventing trades, withdrawals, or transfers—until ownership is formally transferred to the adult beneficiary.4 This protects both the firm and the beneficiary from unauthorized transactions. If an account becomes restricted due to a delayed transfer, the restrictions typically remain in place until the custodian initiates the transfer process.

Enforcement Actions and Industry Consequences

The importance of proper supervision became clear in December 2019, when FINRA sanctioned five major firms—Citigroup, J.P. Morgan Securities, LPL Financial, Morgan Stanley, and Merrill Lynch—for failing to adequately supervise custodial accounts. The firms paid combined fines of $1.4 million after allowing custodians to conduct transactions in more than 80,000 accounts months or even years after the beneficiaries had reached the age of majority. FINRA found that the firms had failed to establish reasonable supervisory systems to track termination dates and ignored red flags, including customer complaints.

What Advisors Cannot Do

Financial advisors cannot legally take instructions from a custodian to delay a transfer, move assets into a trust, or otherwise circumvent the beneficiary’s right to the assets—regardless of the custodian’s intentions or concerns about the beneficiary’s financial maturity. If unauthorized transactions occur in custodial accounts after termination, the broker-dealer may be held responsible for failing to supervise and prevent the violation.20 Advisors navigating these situations should document all conversations with custodians, clearly explain the legal requirements, and escalate to compliance when custodians resist transferring assets.

Conclusion

UGMA and UTMA custodial accounts offer a simple, flexible way to transfer assets to minors and can provide tax benefits on modest investment earnings. They’re particularly well-suited for families who value spending flexibility, want to fund expenses beyond education, or prefer a simpler alternative to trusts.

However, the irrevocable nature of contributions, the automatic transfer of control at the age of majority, and the significant impact on financial aid eligibility are meaningful drawbacks that deserve careful consideration. Families anticipating that their child will apply for need-based financial aid may find that the FAFSA treatment of custodial accounts outweighs other benefits.

As with any financial planning decision, the right choice depends on your family’s specific circumstances, goals, and time horizon. Consulting with a financial advisor or tax professional can help you weigh these factors and determine the most appropriate savings strategy for your situation.

Notes

1. Commons LLC. (n.d.). UGMA vs UTMA: The key differences for gifting to a minor. https://www.commonsllc.com/insights/difference-between-ugma-and-utma
2. LegalClarity. (2025, December 10). What are the UTMA withdrawal rules for the IRS? https://legalclarity.org/what-are-the-utma-withdrawal-rules-for-the-irs/
3. Charles Schwab. (n.d.). Saving for college: Custodial accounts. https://www.schwab.com/learn/story/saving-college-custodial-accounts
4. Fidelity. (2025, January). UGMA & UTMA accounts: Tips for custodial accounts. https://www.fidelity.com/learning-center/personal-finance/custodial-account-for-kids
5. FINRA. (2020, February 27). Regulatory Notice 20-07: UTMA and UGMA accounts. https://www.finra.org/rules-guidance/notices/20-07
6. SmartAsset. (2025, May 16). UGMA vs. UTMA custodial accounts. https://smartasset.com/investing/ugma-vs-utma
7. Finaid.org. (2020, May 26). UGMA & UTMA custodial accounts. https://finaid.org/savings/ugma/
8. Saving for College. (2025, January). Kiddie tax explained: Rules, 2025 + 2026 values, and its impact on your finances. https://www.savingforcollege.com/article/what-is-the-kiddie-tax
9. Internal Revenue Service. (n.d.). Topic no. 553, Tax on a child’s investment and other unearned income (kiddie tax). https://www.irs.gov/taxtopics/tc553
10. Capital Group. (n.d.). UGMA/UTMA age of majority by state. https://www.capitalgroup.com/advisor/account-resource-center/ugma-utma/age-of-majority.html
11. Finaid.org. (2025, October 23). Age of majority and trust termination. https://finaid.org/savings/ageofmajority/
12. Nolo/WillMaker. (2025, October 23). The Uniform Transfers to Minors Act. https://www.willmaker.com/legal-manual/wills/the-uniform-transfers-to-minors-act.html
13. LegalClarity. (2025, December 8). How the Uniform Gifts to Minors Act (UGMA) works. https://legalclarity.org/how-the-uniform-gifts-to-minors-act-ugma-works/
14. US Law Explained. (n.d.). The Uniform Transfers to Minors Act (UTMA): Your ultimate guide. https://uslawexplained.com/uniform_transfers_to_minors_act
15. Accounting Insights. (2025, June 24). What counts as a UTMA qualified expense? https://accountinginsights.org/what-counts-as-a-utma-qualified-expense/
16. The Balance. (2024, September 6). Can you make withdrawals from your child’s UTMA money? https://www.thebalancemoney.com/spending-childs-utma-money-illegal-358134
17. Fleming & Curti, PLC. (2010, February 8). UTMA custodian accountable after beneficiary’s majority. https://elder-law.com/utma-custodian-accountable-after-beneficiarys-majority/
18. Law Office of Paul L. Feinstein, Ltd. (n.d.). Perplexing problems under the Uniform Transfers to Minors Act. https://www.paulfeinstein.com/perplexing-problems-under-the-uniform-transfers-to-minors-act/
19. Hall Booth Smith, P.C. (2024, January 16). UTMA custodial accounts: Transferring to a trust. https://hallboothsmith.com/utma-custodial-accountsand-utma-remorse-transferring-a-utma-account-to-a-trust/
20. ThinkAdvisor. (2019, December 26). FINRA fines 5 big firms for ‘Know Your Customer’ failures. https://www.thinkadvisor.com/2019/12/26/finra-fines-5-big-firms-for-know-your-customer-failures/

Disclaimer

This article is provided for informational and educational purposes only and does not constitute legal, tax, or financial advice. The information presented reflects general principles and may not apply to your specific circumstances. Tax laws, regulations, and financial aid formulas are subject to change, and the information in this article may become outdated. The sources cited herein are believed to be reliable, but their accuracy and completeness cannot be guaranteed. Before making any decisions regarding custodial accounts, estate planning, or financial strategies, you should consult with qualified professionals, including a licensed attorney, certified public accountant, or registered financial advisor who can evaluate your individual situation. Neither the author nor any affiliated parties assume responsibility for any errors or omissions, or for any actions taken or not taken based on the information contained in this article.