If you are the custodian of a UTMA or UGMA account, your fiduciary duty to the minor beneficiary is the controlling rule of the job: every decision you make about the money has to put the child’s financial interest ahead of your own, and you can be held personally liable if it does not.1Social Security Administration. POMS SI 01120.205 – Uniform Transfers to Minors Act The gift into the account is irrevocable the moment it is made. The child owns the assets from that point forward. You control investment choices and spending until the state’s termination age, but that control is held in trust, not as your own property.
The Prudent Person Standard
Every state’s UTMA holds custodians to the prudent person standard. In plain terms, you must manage the account with the same care and skill a reasonable person would use when handling someone else’s property. Courts apply this benchmark when they look back at what you did.
The standard gives you broad investment discretion. Stocks, bonds, mutual funds, and certificates of deposit are all available to you. What the standard requires is that your choices preserve and grow the child’s assets on a timeline that matches when the child will actually need the money. A custodian with real financial expertise is held higher: the law expects you to use that specialized knowledge for the minor’s benefit rather than coast on the standard applied to a layperson.
This is where the standard bites. Pouring a 10-year-old’s college fund into a single volatile stock or cryptocurrency does not look prudent when a judge reviews it years later. Courts examine whether you researched options, diversified appropriately, and made decisions consistent with the minor’s financial horizon. If the answer is no, you can be ordered to replace the losses from your own pocket.
Spending for the Child’s Benefit
You can spend account assets for the “use and benefit” of the minor without a court order. That phrase is intentionally broad. It covers private tutoring, summer enrichment programs, specialized medical equipment, educational travel, a computer for schoolwork, college application fees, car insurance, music lessons. The spending should enhance the child’s life in ways that go beyond ordinary parental support.
The constraint is that every withdrawal has to connect to a genuine, verifiable benefit for the child. A custodian cannot simply drain the account on loosely justified purchases. If you cannot tie a withdrawal to something specific the minor received, it is exposed as a breach of duty.
The Parental Support Trap
One of the most common ways custodians get into trouble is using the account to cover expenses that parents are already legally required to provide. Basic food, standard clothing, and housing are parental obligations, not appropriate charges against the child’s custodial account. Paying the family’s grocery bill or the monthly rent out of the account depletes assets the child owns and shifts a parental duty onto the minor’s savings. Courts treat this as a breach, and the minor can seek reimbursement after reaching adulthood.
Self-Dealing and Prohibited Uses
The most serious violations involve self-dealing, which means using the minor’s assets for your own benefit. Borrowing from the account, pledging it as collateral for a personal loan, or putting the money into your own business all qualify. The consequences are court-ordered repayment, removal as custodian, and personal liability for damages plus interest.
Self-dealing does not always look dramatic. Buying something “for the child” that really benefits the household, covering your own bills during a tight month with a plan to repay later, or investing the custodial funds in a family member’s business venture all cross the line. The legal test is whether the transaction benefited the custodian rather than the minor. Judges take a dim view of explanations that amount to “I was going to pay it back.”
When the minor reaches adulthood, they gain standing to sue for any misuse that occurred during the custodianship. Claims can cover the full amount misused plus interest accrued from the date of the breach. Most minors do not discover problems until they receive the account and find less money than expected, which is exactly why your records matter so much.
Keep the Money Separate, and Keep Records
Custodial property must be kept completely separate from your personal finances. Commingling the child’s assets with your own bank accounts or investments is a standalone violation even if you never spend a dime of the child’s money. The assets must be clearly identifiable as custodial property at all times. This protects them from your personal creditors and keeps the accounting clean.
Beyond separation, track every transaction: deposits, withdrawals, interest, dividends, and capital gains. Keep receipts for every expenditure made on the child’s behalf, along with a brief note explaining the purpose. Monthly statements from the financial institution may not be enough on their own. A simple ledger documenting why each withdrawal was made is the kind of evidence that resolves disputes quickly, or prevents them entirely.
The minor or their legal representative can request a formal accounting of all account activity at any time. If you cannot produce accurate records when asked, courts tend to presume mismanagement. That presumption shifts the burden to you to prove the money was spent properly rather than requiring the minor to prove it was not.
Tax Filings Are Part of the Job
Because the minor legally owns the assets, the investment income inside the account belongs to the child for tax purposes. As custodian, you are responsible for making sure the appropriate returns are filed. This is a detail many custodians overlook until the IRS sends a notice.
The Kiddie Tax
For 2026, a child’s unearned income above $2,700 triggers the “kiddie tax,” which taxes that excess at the parent’s marginal rate rather than the child’s lower rate.2Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax) It applies to children under 18, and in some cases to those under 19, or under 24 if they are full-time students. The tax is calculated on Form 8615 and filed with the child’s return.
Gift Tax on Contributions
Contributions to a UTMA or UGMA account count as gifts for federal tax purposes. For 2026, the annual gift tax exclusion is $19,000 per donor per recipient.3Internal Revenue Service. What’s New – Estate and Gift Tax Contributions up to that amount require no gift tax return. A married couple can combine their exclusions for up to $38,000 per child per year. Contributions above the exclusion do not necessarily trigger tax, but the donor must file Form 709, and the excess counts against their lifetime gift and estate tax exemption.
Naming a Successor Custodian
What happens to the account if you die, become incapacitated, or can no longer serve is a question most custodians never think about until it is too late. Designating a successor is part of acting prudently and prevents the account from falling into a legal limbo that requires court intervention.
Most financial institutions have a simple form. You name a replacement, sign with either notarization or a signature guarantee, and submit it. The designation takes effect only upon your death, incapacity, or resignation, so it does not transfer any current control. Submitting a new designation revokes any prior one.
If no successor is named and the custodian cannot serve, state law provides a fallback. In most states, a minor who is at least 14 can designate a successor from among adult family members, the minor’s conservator, or a trust company. If the minor is younger than 14 or does not act within 60 days, the minor’s legal conservator steps in. When no conservator exists, an interested party has to petition a court to appoint a successor. Court proceedings add time, expense, and uncertainty.
Ending the Custodianship
Your legal authority expires when the minor reaches the age of termination set by the state governing the account. In most states, this is either 18 or 21. At that point, you must transfer every remaining asset to the now-adult beneficiary and provide a final accounting of all transactions during the custodianship. Delaying the transfer or holding back funds past the termination date exposes you to litigation.
The transfer itself involves notifying the financial institution and completing paperwork to re-register the account in the beneficiary’s name alone. Once that is done, you have no further authority or responsibility over how the young adult uses the money.
A handful of states let the donor extend the termination age beyond 21, up to 25 in most cases, and Wyoming permits custodianship until age 30 if the custodian notifies the minor within six months of the minor turning 21. The extension must be chosen when the account is established; you cannot retroactively push back the termination date. If the account is extended, your fiduciary duty and personal liability continue for the entire extended period.
Compensation
A custodian who is not the original donor may charge reasonable compensation for managing the account. The operative word is “reasonable.” The law does not set a specific dollar amount or percentage, and a fee that looks excessive relative to the size of the account or the work involved can itself be a breach of fiduciary duty. Many family-member custodians charge nothing. Those who do should document the basis for the fee and make sure it reflects the actual time and effort spent. A custodian who is also the person who made the gift is generally not entitled to compensation at all.