UGMA/UTMA Custodial Accounts: Control, Taxes, and Age of Transfer

The practical difference between UGMA and UTMA custodial accounts comes down to what you can put in them: a UGMA account holds financial assets like cash, stocks, bonds, mutual funds, life insurance, and annuities, while a UTMA account can hold virtually any kind of property, including real estate, art, royalties, and intellectual property.¹ Everything else about the two account types works the same way. An adult custodian manages the account for the benefit of a child, the gift is irrevocable, and the child takes full control at an age set by state law.

If you only plan to put cash and securities into the account, either type works and most brokerages will open the version their state has adopted. If you want to gift something like a piece of real estate, a collection, or royalty rights, you need a UTMA. Every state has enacted some version of these uniform acts, but the exact rules about permissible property and termination ages vary, so confirm your state’s version before funding an account with anything unusual.

Who Owns the Money and Who Controls It

The child owns the assets from the moment of transfer. The custodian only manages them. A gift into a UGMA or UTMA account is irrevocable and conveys legal title to the minor immediately.² You cannot change your mind and take the money back, even if the child’s circumstances shift or you regret the gift.

Custodians are held to a prudent-person standard, which courts have read as effectively imposing the same duties that apply to trustees. That includes a duty to preserve the assets and avoid speculative bets. A custodian who gambles with the portfolio can face personal liability to the child.

Funds must be spent solely for the child’s benefit. Enrichment activities, educational expenses beyond what a parent is legally obligated to provide, and investment management fees are generally acceptable uses. What crosses the line is using custodial money to cover expenses the parent already owes as a legal obligation, such as basic food, shelter, and clothing. Parents who dip into the account to cover their own support obligations risk legal challenges.³

How the Earnings Are Taxed

Because the child legally owns the account, investment earnings are reported under the child’s Social Security number. But Congress limited the benefit of shifting income to a minor through the “kiddie tax” under Internal Revenue Code Section 1(g).⁴

For the 2026 tax year, the tiers work like this:

The first $1,350 of unearned income is not taxed. This matches the standard deduction for a dependent with investment income.
The next $1,350 is taxed at the child’s own rate, usually the lowest bracket.
Anything above $2,700 is taxed at the parent’s marginal rate, which eliminates the tax advantage of holding the assets in the child’s name.

These thresholds adjust for inflation annually.⁵ The kiddie tax applies to children under 18, and in some cases to older children up to age 23 who are full-time students and whose earned income does not cover more than half their own support.⁴

When a child’s unearned income exceeds $2,700, file Form 8615 with the child’s tax return.⁶ If the child’s only income is interest and dividends totaling less than $13,500, you can instead elect to report it on your own return and skip filing a separate return for the child.

Gift and Estate Tax Rules

Every transfer into a custodial account is a completed gift for federal tax purposes. For 2026, the annual gift tax exclusion is $19,000 per recipient. A grandparent can put up to $19,000 into a grandchild’s account in a single year without filing a gift tax return, and a married couple can combine exclusions for $38,000 per child per year. Contributions above the annual exclusion count against your lifetime exemption, which sits at $15,000,000 for 2026.⁷

One estate tax trap catches people off guard. If the person who funded the account also serves as the custodian and dies before the account terminates, the entire balance can be pulled back into their taxable estate under IRC Section 2038.⁸ The IRS treats the custodian’s management powers as a retained ability to alter or control the transferred property. The simple fix is to name someone other than the donor as custodian. A spouse, grandparent, or other trusted adult works.

When the Child Takes Over

Custodial accounts are temporary. Once the child reaches the age set by state law, the custodian must hand over full control. Most states set this age between 18 and 21, and several allow UTMA accounts to extend as late as 25.⁹ Some states let the donor pick a termination age within a permitted range when opening the account.

Once the account terminates, the young adult has absolute authority over the money. They can pay for college, buy a car, invest it, or spend it on something frivolous. The former custodian has no legal standing to restrict access or dictate how the funds are used. That is the tradeoff for the simplicity of a custodial account compared with a formal trust, which can carry spending restrictions well into adulthood. If handing an 18-year-old a large sum without guardrails concerns you, a trust may be worth the higher setup cost.

Naming a Successor Custodian

If the custodian dies or becomes unable to serve before the account terminates, someone has to step in. Most state versions of the UTMA let the original custodian designate a successor in advance, and this is one of the most overlooked steps in opening the account. Without a named successor, the process gets messier.

When no successor is on file, many states let a minor who has reached age 14 name a replacement, usually an adult family member or a trust company. If the minor is younger than 14 or does not act within the state’s window, the minor’s legal guardian or conservator usually takes over. When none of that works, an interested party has to petition a court. Most brokerages include a successor custodian field on the account application, so filling it in at the outset takes almost no effort.

Effect on Financial Aid

Custodial accounts hit the FAFSA harder than most families expect. Because the child legally owns the assets, federal financial aid formulas treat the account as a student asset rather than a parental asset. For the 2026–2027 award year, the Student Aid Index formula assesses student-owned assets at a flat 20% conversion rate. Parental assets are assessed at 12%, and only after subtracting an asset protection allowance.¹⁰

For families expecting to qualify for need-based aid, the gap between those two rates is large enough that some financial planners recommend spending down a custodial account on legitimate expenses for the child before the FAFSA is filed.

Effect on SSI and Medicaid

Families with a child who receives Supplemental Security Income or Medicaid need to be careful. While the child is still a minor, the Social Security Administration does not count the account as an available resource, because state law prevents the child from accessing the funds directly. In the month the child reaches the state termination age, however, the entire balance becomes a countable resource.¹ If the balance exceeds the SSI resource limit, the child can lose eligibility. For a child with a disability who depends on SSI and Medicaid, a special needs trust is almost always a better choice than a custodial account.

Custodial Accounts Compared to 529 Plans

Families often weigh a UGMA or UTMA account against a 529 education savings plan. The right choice usually depends on whether the money will definitely go toward education.

Custodial accounts place no restrictions on how the money is eventually spent. A 529 plan offers tax-free growth only when funds pay for qualified education expenses; non-qualified withdrawals trigger income tax and a 10% penalty on the earnings portion.
Custodial account earnings are taxed annually under the kiddie tax rules. 529 plan earnings grow tax-deferred and come out tax-free for qualifying expenses.
A custodial account is assessed at the 20% student-asset rate on the FAFSA. A parent-owned 529 plan is assessed at the lower parental rate.¹⁰
When a custodial account terminates, the child takes full control with no restrictions. A 529 plan stays in the account owner’s name, usually the parent, who keeps the ability to change the beneficiary to another family member.
Custodial accounts can hold individual stocks, ETFs, bonds, and (for UTMA accounts) real estate or other property. 529 plans limit you to the fund options offered by the plan.

A 529 plan is generally the stronger choice when you’re confident the money is heading toward education. A custodial account makes more sense when you want the child to have unrestricted access as a young adult, or when you want to transfer property types a 529 cannot hold.

Opening the Account

Most brokerages, banks, and mutual fund companies offer UGMA and UTMA accounts. Setup is straightforward and typically requires the child’s full legal name, date of birth, and Social Security number for tax reporting, along with the custodian’s own identification. Many firms include a field for the termination age (where state law permits a range) and for naming a successor custodian; fill both in.

You fund the account with an initial transfer from a bank account or by moving existing securities into the custodial registration. Once funded, the account is titled in the child’s name with the custodian managing it, and investment decisions proceed like any other brokerage or bank account. There are no contribution limits specific to these accounts, though contributions above the $19,000 annual gift tax exclusion per donor require filing a gift tax return.⁷

1
Social Security Administration. Uniform Transfers to Minors Act
2
Congress.gov. Public Law 87-821
3
FINRA. FINRA Reminds Member Firms of Their Responsibilities for Supervising UTMA and UGMA Accounts
4
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
5
Internal Revenue Service. Rev Proc 2025-32
6
Internal Revenue Service. Topic No 553, Tax on a Childs Investment and Other Unearned Income (Kiddie Tax)
7
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
8
Office of the Law Revision Counsel. 26 US Code 2038 – Revocable Transfers
9
Social Security Administration. SI SEA01120.205 The Legal Age of Majority for Uniform Transfer to Minors Act (UTMA)
10
Federal Student Aid. 2026-2027 Federal Student Aid Handbook – Student Aid Index (SAI) and Pell Grant Eligibility