UTMA/UGMA Accounts for Kids

UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gifts to Minors Act) accounts are custodial investment accounts designed to help adults save and invest for the benefit of a minor. With these accounts, you can transfer assets—such as cash, stocks, or mutual funds—to a child, but an adult custodian manages the account until the child reaches the age of majority, which varies by state (typically 18 or 21).

The main difference between UTMA and UGMA accounts is the type of assets each can hold. UGMA accounts are limited to financial assets like cash, stocks, and bonds. In contrast, UTMA accounts are more flexible and can also hold physical assets such as real estate, fine art, or even patents, depending on state laws.

Both account types offer these benefits:

• Allow you to invest on behalf of a child, teaching them about saving and investing;
• Provide a straightforward way to transfer wealth or gifts to minors;
• Offer professional management by a custodian until the child is legally old enough to take control.

To estimate how contributions and investment growth can accumulate in a custodial account, you can use the future value formula:

Where:

• $FV$ is the future value of the account;
• $P$ is the amount contributed each period;
• $r$ is the expected rate of return per period;
• $n$ is the number of periods.

For example, if you contribute $1,000 per year to a UTMA account for 10 years with an average annual return of 6%, you can use this formula to calculate the total amount when the child reaches adulthood.

When a custodial account is set up, the assets legally belong to the minor, but the custodian manages the account. Once the minor reaches the age of majority, control—and legal ownership—of the account transfers entirely to them. This means they can use the funds for any purpose, not just for education. It's important to plan for this transition, as the custodian has no control over how the assets are used once the account is handed over. Additionally, custodial accounts may impact a child's eligibility for financial aid, as the assets are considered the student's property for federal aid calculations.