The Uniform Gifts to Minors Act lets an adult transfer cash or securities to a child through a custodial account without a lawyer or a formal trust. The money becomes the child’s property the moment it hits the account, an adult custodian manages it until the child reaches the age of majority under state law (18 in most states, 21 in others), and at that point the child takes full, unrestricted control. That simplicity is the appeal. The tax bill on investment income, the hit to college financial aid, and the fact that you cannot put strings on the money once the child is an adult are the reasons to think carefully before funding one.
How a UGMA Account Is Set Up
Three roles are involved: a donor who contributes the money, a custodian who manages it, and the minor who owns it. Most banks and brokerages will open the account with a standard form.
The gift is irrevocable. Once you deposit money, it belongs to the child. You cannot pull it back, redirect it to a sibling, or reclaim it if your circumstances change.
The custodian can be the donor, a parent, a grandparent, another trusted adult, or a financial institution. The account is titled in a specific way that flags the custodial relationship: “[Custodian Name] as Custodian for [Minor Name] under the [State] Uniform Gifts to Minors Act.”1FINRA. FINRA Reminds Member Firms of Their Responsibilities for Supervising UTMA and UGMA Accounts That titling keeps the assets legally separate from both the custodian’s personal property and the donor’s estate, provided the donor is not also the custodian (more on that under taxes).
UGMA accounts are limited to financial assets: cash, bank deposits, publicly traded stocks and bonds, mutual funds, and insurance or annuity contracts. Real estate, art, patents, and other non-financial property cannot be held in a UGMA. If you want to gift those, a UTMA account is the vehicle that works.
What the Custodian Can and Cannot Do
The custodian is a fiduciary. In plain terms, that means investing the child’s money with the care a reasonable person would use managing someone else’s property. Concentrating the account in a single speculative stock would likely breach that duty; diversifying across age-appropriate investments is the safer path.
Spending is allowed only for the child’s direct benefit. Tutoring, summer camp, a musical instrument, or other enrichment expenses are fine. What the custodian cannot do is use the money for basic support the parent already owes: groceries, housing, everyday clothing. Substituting UGMA funds for expenses a parent is legally obligated to cover crosses the line, and the child can challenge those withdrawals after reaching adulthood.
Custodians are entitled to reasonable compensation, though family custodians rarely charge. Records of every transaction, dividend, and expense need to be kept, because they feed the child’s annual tax return and matter if anyone later questions how the money was spent.
How UGMA Income Is Taxed
Every dollar of interest, dividends, and capital gains the account earns is the child’s income, reported under the child’s Social Security number. Children don’t get a free pass, though. The “kiddie tax” rules apply to unearned income of any child under 18, plus 18-year-olds and full-time students under 24 whose earned income doesn’t cover more than half their own support.2Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax)
For 2026, the kiddie tax works in three tiers:3Internal Revenue Service. Rev. Proc. 2025-32
- The first $1,350 of unearned income is tax-free, matching the standard deduction for a dependent with only unearned income.
- The next $1,350 is taxed at the child’s own rate, which is 10% for most children.
- Anything above $2,700 is taxed at the parents’ marginal rate.
That third tier is where the kiddie tax bites. A child with $10,000 in UGMA dividends is not paying a child-sized bill on the amount above $2,700; the IRS treats it as if the parents earned it. The child files their own return using Form 8615 to calculate the tax.4Internal Revenue Service. 2025 Instructions for Form 8615 – Tax for Certain Children Who Have Unearned Income
Parents have an alternative. If the child’s gross income is more than $1,350 but less than $13,500 for 2026, the parents can elect to report the child’s unearned income on their own return using Form 8814 instead of filing a separate return for the child.3Internal Revenue Service. Rev. Proc. 2025-32 It simplifies paperwork, though it may push the parents’ adjusted gross income higher.
Gift Tax on the Contribution
Funding a UGMA is a completed gift the moment the money goes in. For 2026, the annual federal gift tax exclusion is $19,000 per donor per recipient.5Internal Revenue Service. Frequently Asked Questions on Gift Taxes A married couple can split gifts and contribute up to $38,000 to a single child’s UGMA in one year with no gift tax consequences.
Contributions within the annual exclusion require no IRS paperwork. Go over that amount and you file Form 709 to report the gift. The excess doesn’t necessarily trigger a tax bill; it reduces your lifetime gift and estate tax exemption, which for 2026 is $15 million per person under recently enacted legislation. Actual gift tax kicks in only after you exhaust that lifetime exemption.6Office of the Law Revision Counsel. 26 U.S.C. 2503 – Taxable Gifts
Don’t Name Yourself as Both Donor and Custodian
Because the contribution is irrevocable, the account’s value normally stays out of the donor’s taxable estate. There’s one big exception: when the donor is also the custodian. If a donor-custodian dies before the child reaches the age of majority, the IRS can pull the entire account balance back into the donor’s gross estate under Internal Revenue Code Section 2038.7Office of the Law Revision Counsel. 26 U.S.C. 2038 – Revocable Transfers The reasoning is that a custodian’s power over how and when to spend the money looks like a retained power to change who benefits from the gift.8eCFR. 26 CFR 20.2038-1 – Revocable Transfers
The fix is simple. Name someone other than the donor as custodian. For most families, the $15 million exemption means estate tax won’t apply anyway, but anyone with a larger estate should take this step seriously.
The Financial Aid Cost
This is where UGMA accounts trip families up. On the FAFSA, a UGMA is reported as the student’s asset, not the parents’, because the child is the legal owner. The federal formula assesses student assets at 20% when calculating the Student Aid Index, meaning one-fifth of the account balance is treated as available to pay for college each year.9Federal Student Aid. Student Aid Index (SAI) and Pell Grant Eligibility – 2025-2026 FSA Handbook
Parental assets are assessed at a maximum of 12%, and only after protection allowances shield a portion of parental savings entirely. The gap is significant. A $50,000 UGMA reduces financial aid eligibility by $10,000 per year; $50,000 held in a parent’s name reduces it by considerably less.
Any interest, dividends, or capital gains from the UGMA that appear on the student’s tax return also count as student income on the FAFSA, and student income is assessed at an even steeper rate. Families who plan to apply for need-based aid should weigh this before funding a large custodial account. A 529 college savings plan, reported as a parental asset for dependent students even when the student is the beneficiary, often produces a better aid outcome.
What Happens When the Child Reaches the Age of Majority
The account terminates automatically when the child reaches the age of majority set by state law, which is 18 in most states and 21 in others.10Social Security Administration. POMS SI 01120.205 – Uniform Transfers to Minors Act No grace period. No extension. No discretion. The custodian retitles the securities and bank accounts into the adult’s name and hands over complete control.
From that point, the new adult can spend the money on anything. If the account was intended for college but the 18-year-old wants a car or a gap year abroad, that is their legal right. Neither the donor nor the custodian has any mechanism to restrict, delay, or redirect the funds. This mandatory, no-strings handover is the single biggest drawback of the UGMA structure, and it pushes many families toward 529 plans or formal trusts instead.
UGMA vs. UTMA
The Uniform Transfers to Minors Act is the modern successor to UGMA and has been adopted in some form by nearly every state. Two differences matter.
The first is asset scope. UGMA is limited to financial assets. UTMA accounts can hold virtually any property, including real estate, fine art, royalties, and patents.11Legal Information Institute. Uniform Gifts to Minors Act (UGMA)
The second is termination age. UGMA accounts end at 18 or 21 depending on the state, with no option to extend. UTMA accounts in many states allow the donor to specify a later termination age, up to 25 in some jurisdictions.12Social Security Administration. POMS SI SEA01120.205 – The Legal Age of Majority for Uniform Transfer to Minors Act (UTMA) Those extra years can matter for families uncomfortable handing a large sum to an 18-year-old. If your state offers UTMA accounts and you haven’t opened a custodial account yet, UTMA is almost always the better choice. Existing UGMA accounts remain governed by the original act and cannot simply be converted.