UGMA is an acronym for the “Uniform Gifts to Minors Act.” An UGMA account allows individuals to gift or transfer assets to an account for a minor beneficiary. The act was implemented in 1956 and revised in 1966. Parents often used UGMA accounts to transfer assets to their children.
Note the past tense. In 1986, the Uniform Transfers to Minors Act (UTMA) was passed and, in the intervening years, UGMA accounts have been superseded by UTMA accounts in all 50 states and the District of Columbia. South Carolina was the last state to do this, in March 2022. However, existing UGMA accounts are still valid and operational until their date of expiration.
For those looking to open any sort of custodial account for a minor beneficiary, we suggest that you consult with a knowledgeable attorney or financial advisor who is familiar with the rules for your state.
How does an UGMA account work?
An UGMA account is a custodial account designed to hold and protect assets transferred to a minor beneficiary. The person who established it could choose to be its custodian or could designate another person or a financial institution to take this role. The custodian can invest assets in the account in mutual funds, exchange-traded funds (ETFs), stocks, bonds, and other assets on behalf of the beneficiary. Money in the account cannot be invested in real assets, also called “tangible” assets, such as real estate, infrastructure, and natural resources.
An UGMA account was typically opened through a brokerage firm or financial institution. It has no contribution limits, whether annual or lifetime, and anyone can contribute to it. All contributions are irrevocable; the funds become the property of the account as soon as the contribution is made.
Money in the account can be used for any purpose that benefits the minor beneficiary. It is not, for example, restricted to educational costs, like a 529 plan.
The beneficiary assumes control of the account once they reach the age of majority in their state (or at the age specified by their state if it has passed additional rules on this), at which point they may spend the funds as they see fit..
Pros and cons of an UGMA account
Pros:
- Easy to establish. An UGMA account could be opened at most brokers and many financial institutions by anyone: parents, other family members, friends, or others.
- No contribution limits. There are also no withdrawal limits or restrictions.
- Multipurpose use. There are no limitations as to how the money in an UGMA account is used as long as it’s for the benefit of the minor beneficiary.
- Easier than a trust. Establishing an UGMA account allowed the creator to forgo the process of creating a trust for the minor beneficiary, which can be expensive and more restrictive.
- Tax-free withdrawals.
Cons:
- Irrevocable contributions. Once a contribution is made, the money becomes the ultimate property of the minor beneficiary. There is no way for the parent, family member, or other donor to take it back.
- No restrictions on adult beneficiaries. Once the minor beneficiary reaches the age at which they can assume control of the account, the money in it is theirs to use as they please, without restriction.
- Can reduce financial aid for college. As the money belongs to the beneficiary at the age of majority, it is counted as an asset they own. This can limit access to student loans as well as other types of need-based aid.
- Contributions not tax deductible. This differs from the tax break you can get for contributing to a 529 plan in some cases.
- Possible tax on earnings. The account’s earnings can trigger what’s called the “kiddie tax” if they surpass certain thresholds. This means that the beneficiary and/or the account trustee could receive a tax hit from unearned income generated by the account.
How to open an UGMA account
Though we were unable to confirm this on a state-by-state basis, it is highly unlikely that you will be able to open a new UGMA account today in light of the fact that the UTMA has superseded the UGMA (all states repealed UGMA before enacting UTMA). In speaking with one major brokerage firm in researching this article, the rep indicated they were not even able to access the opening screens for an UGMA account.
The steps below are the ones that would have been appropriate when opening an UGMA account in the past. They are presented here for illustrative and informational purposes, as they would also largely apply to opening an UTMA account today.
Choose a broker or financial institution
You can open an UGMA account at any number of financial institutions, including most brokers and banks. Whether you use your regular broker or a new one, be certain they are experienced with UGMA accounts and understand the fees and types of investments involved.
Open the account
This is generally a pretty simple and straightforward process that can usually be done on the broker’s website. If you go with a bank, there may be a few additional requirements, but nothing that is overly complicated.
At the very least you will need the minor beneficiary’s legal name, date of birth, and Social Security number. Reach out to the institution where you are planning to open the account ahead of time to avoid any snags in the process.
Fund the account
There are no contribution limits, but there can be tax considerations for donors. If someone’s contribution to the account is over the annual gift exclusion limit established by the Internal Revenue Service (IRS), the excess amount will trigger the gift tax and count against the donor’s lifetime gift and estate tax exclusion. (For 2024 the limits are $18,000 per gift recipient annually and a lifetime gift and estate tax exclusion of $13.61 million per individual.)
Decide how to invest
Assets in an UGMA can be invested in most types of financial assets, such as mutual funds, ETFs, individual stocks and bonds, cash, and others. Tangible assets, such as real estate, gold, jewelry, and collectibles, are not allowed. (They are allowed for an UTMA account.)
In some cases you may want to involve the minor beneficiary of the account in the investment process. If they are old enough, this can help teach them about investing and be an excellent learning experience.
Alternatives to an UGMA
UGMA account vs. 529 plan
Unlike an UGMA account, a 529 plan is a tax-advantaged account designed specifically to save for college. Up to $10,000 per year can also be used to fund K-12 education expenses.
In some cases there are deductions available for contributions to your home state 529 plan. Money distributed from a 529 plan that is used for qualified educational expenses can be withdrawn tax free. Here is a comparison of UGMA accounts versus 529 plans.
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| It can be used for any purpose as long as the money is spent for the benefit of the minor beneficiary. | Distributions for qualified educational expenses can be withdrawn tax free. Funds can be used for other family members if not used fully by the beneficiary. Money left in the plan can also be used to pay down student loans. Under new rules, up to $35,000 can be transferred to a Roth IRA for the account beneficiary. |
| Money is not contributed on a tax-deferred basis, nor does it grow tax free inside of the account. | Some states offer a state income tax deduction on contributions to the state’s 529 plan; funds inside of the 529 grow on a tax-free basis. |
| Contributions count as annual gifts. | Contributions count as annual gifts. |
| Money is not taxed when withdrawn, but earnings in the account can be taxable to the minor beneficiary and/or the parents in some cases. | There are no taxes unless the money is withdrawn and used for a purpose other than qualified educational expenses for the beneficiary or other family members. Nonqualified withdrawals can also be subject to a 10% penalty. |
| There are none, but contributions can be subject to gift tax limits. | |
UGMA vs UTMA
UGMA and UTMA accounts are similar in many respects. Both are custodial accounts created for the benefit of a minor beneficiary, who gains control of the account upon reaching a certain age dictated by their state (often the age of majority in the state).
The major difference is in the type of assets that can be held in the account. In an UGMA account investments are limited to standard financial assets, such as mutual funds, ETFs, stocks, and similar holdings. An UTMA account can also hold real assets, also known as “tangible” assets.
Again, as of 2022 UGMA accounts have been superseded by UTMA accounts in all 50 states and the District of Columbia. However, existing UGMA accounts still function until their beneficiary assumes control of the funds.
TIME Stamp: Existing UGMA accounts are still valid; UTMA accounts have superseded them
An UGMA account was a solid way to save for a child’s college expenses or other needs they might have as an adult, with fewer expenses and complications than a trust. The money does have to be used for the benefit of the minor beneficiary, and gifts to an UGMA account are irrevocable; they cannot be returned to their donors once made.
Two potential downsides are that the account may disadvantage the beneficiary when applying for financial aid, and the earnings in the account could trigger taxes for the beneficiary and/or their parents.
New UGMA accounts are not available, having been replaced by UTMA accounts. Existing ones can continue to be used and funded as originally intended until they expire.
Frequently asked questions (FAQs)
How are gifts to minors taxed?
Contributions to an UGMA or UTMA account are not subject to income taxes. They are considered gifts to the minor beneficiary and count against the contributing adult’s lifetime estate and gift tax limit. The annual gifting limit for 2024 is $18,000 per person per recipient. The lifetime gift and estate tax exclusion is $13.61 million per person for 2024.
The earnings in the account could trigger a tax liability on the part of the minor beneficiary and/or their parents if these earnings exceed certain levels.
What happens to an UGMA account when a child turns 18?
If 18 is the age of majority in their state of residence, then at age 18 the assets in the UGMA account go to the beneficiary. In other states the age of majority may be higher (21 is common). Some states allow the person who establishes the account to designate an age as high as 25 for when the account must be turned over to the beneficiary.
Once the funds come under the control of the beneficiary, they can use the money for any purpose they desire.
Can a parent withdraw money from an UGMA account?
Gifts to UGMA accounts are irrevocable and cannot be withdrawn by the beneficiary’s parents except to pay for expenses that are beneficial to the child beneficiary, such as college expenses.
