Custodial Accounts

There are two types of custodial accounts that are most commonly referred to as the Uniform Transfers to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA).  These accounts can allow parents and/or grandparents to start investing for a child today. A UTMA or UGMA account is similar to a brokerage or taxable investment account for minor children. Since children are not eligible to directly own property, UTMA accounts allow parents and grandparents to invest for a child’s future while they are young. You have access to a very wide range of investment options — unlike 529 plans which may have limited options. Your state of residence will determine the age your child will be able to access the funds, however the age of majority for most states is generally 18 or 21 years old. State law can vary with respect to these accounts and some states have tax benefits for you contributing to a child or minor’s 529 account. 

Both of these are similar in goal; however, the UTMA can hold a variety of different asset classes such as real estate and artwork. The UGMA account is limited to financial assets such as cash, securities, bonds, mutual funds. These accounts are a good, flexible option for those parents who want their children’s money to grow but don’t want to restrict the funds specifically to education-related expenses.

One common concern from parents regarding UTMA or UGMA account is the age at which their children will be able to access the funds. With respect to UTMA accounts, capital gains, dividends, and interest accrued in them are taxable to the child’s parents regardless of who owns the account. However, these accounts are tax-free or taxed at a low “kiddie” rate for a specified amount of earnings each calendar (tax) year.