UGMA & UTMA Custodial Accounts for Minors by Tish Michelson

The Uniform Gifts to Minors Act (UGMA) was adopted in 1956 to provide a convenient way to make gifts of money and securities to minors. Later, it became clear that a more flexible law was desirable and the Uniform Transfer to Minors Act (UTMA) was adopted in 1986. UTMA expands the types of property that can be transferred to a minor and provides the ability to make other types of transfers besides gifts. Nearly all states have adopted UTMA, but it is up to each individual state to designate the age in which control passes to the child (generally 18 or 21).

Custodial accounts are similar in some ways to trusts. Both vehicles place property under the control of a person who is not the beneficial owner. In the case of a trust, a trustee manages the property for the benefit of the beneficiaries. In the case of a custodial account, the custodian manages the property for the benefit of the minor.

Custodial accounts are also very different from trusts. The whole point of UGMA and UTMA is to permit you to transfer property to a minor without setting up a trust. Trusts provide greater protection and more flexibility, but are more expensive, time-consuming and complicated. As a general rule, custodial accounts are a better option for smaller transfers. If you expect to transfer tens of thousands of dollars, a trust may be a better vehicle.

A transfer to a child under UTMA or UGMA requires the involvement of a custodian. This is an adult who will manage the property until the child reaches the age (dictated by state) when control passes to the child. Even though the child will not have control of the property until later, the child is the owner as soon as the property is transferred to the account. Any income earned on the account is taxed to the child.

Once you have transferred assets into a custodial account, the assets belong to the child (the beneficial owner) - you are not permitted to take them back. When the child reaches the state-specified age, the account terminates and the custodian is legally required to transfer the property to the child, who can use it any way he or she chooses.

Another difference that may affect your decision between setting up a trust or a custodial account is the number of possible beneficiaries. A custodial account may only belong to one child. It is non-transferable until the account terminates. A trust can be set up for the benefit of many beneficiaries.

Because of non-transferability and financial aid implications, it may not be the best vehicle to save for college. It also may not be the best vehicle to avoid taxes. The best use of a custodial account is in situations where you have a genuine desire to make a specific financial gift to a specific child.