Gifts to Grandchildren: What are UGMA and UTMA Accounts?

The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are sometimes called the “granddaddies” of college savings accounts. Both allow parents to establish custodial accounts for a minor child, and a grandparent can then make gifts to the account.

Because the account is in the name of the child, the tax liability is often shifted to the child, who is presumably in a lower tax bracket than the grandparent or the child's parents. Gifts to such accounts are irrevocable, but the gift-giver retains control of the money and decides how it will be invested.

Things to Know About UGMA and UTMA Accounts

UGMA and UTMA differ in the type of property they permit a person to transfer: States usually restrict UGMA investments to life insurance, cash, and certificates of deposit, while UTMA allows a wider variety of investments, including mutual funds, stocks, bonds, real estate – even artwork. Banking institutions and brokerage firms offer UGMA and UTMA accounts.

Either type of account should be managed by someone other than the parent; otherwise, the parent will be responsible for taxes on the account income. For children or students under age 24, income up to $1,250 is not taxed, income from $1,250 through $2,500 is taxed at the child's rate, and income over $2,500 is taxed at the grandparent's rate (figures for 2023).

Potential Downsides of an UGMA Account or UTMA Account

The major downside of these accounts is that custodians must turn the money over to the child when they reach the age of majority (18 or 21, depending on the state). The child may then do as they wish with the money – and it may not be what you would prefer.

In addition, as with custodial accounts, the child's sudden ownership of the account funds could jeopardize their eligibility for financial aid for college. However, the account could be liquidated, and the proceeds transferred to a custodial 529 account.

Learn more about UGMA and UTMA accounts and read more articles on gifts to grandchildren.

To make a UGMA or UTMA a part of your estate plan, find an attorney near you.