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UGMA vs UTMA: Understanding Custodial Investment Accounts for Minors

Writer's picture: Reuben WoodsReuben Woods

When it comes to saving and investing for a child's future, parents and guardians have a few different account options to consider. Two common choices are the Uniform Gifts to Minors Act (UGMA) account and the Uniform Transfers to Minors Act (UTMA) account. While these custodial accounts share some similarities, there are also important distinctions between the two.


What is a UGMA Account?


A UGMA account is a custodial account that allows adults to gift cash, securities, insurance policies, and other types of assets to a minor child. The adult serves as the custodian and manages the account until the child reaches the age of majority, which is typically 18 or 21 depending on the state. Once the child reaches this age, they gain full control over the account and the assets within it.


UGMA accounts are governed by the Uniform Gifts to Minors Act, which was originally enacted in 1956. These accounts allow a wider range of assets to be contributed compared to some other custodial account types.


What is a UTMA Account?


Like a UGMA, a UTMA account is a custodial account that allows adults to gift assets to a minor child. However, the Uniform Transfers to Minors Act, which was enacted in 1983, expanded the types of assets that can be contributed to include real estate, fine art, patents, royalties, and more.


The custodian manages the UTMA account until the child reaches the age of majority, at which point they gain full ownership. This age is typically 18 or 21 depending on the state, just like with a UGMA.


Key Differences Between UGMA and UTMA


The main differences between UGMA and UTMA accounts come down to the types of assets that can be contributed:


  • UGMA accounts are limited to cash, securities, insurance policies, and certain other financial assets.


  • UTMA accounts have a broader scope and can hold a wider variety of assets including real estate, fine art, patents, royalties, and more.


Another key difference is the taxes on the accounts. UGMA and UTMA accounts are both subject to the "kiddie tax" rules, which means the first $1,100 of unearned income (e.g. investment returns) is tax-free, the next $1,100 is taxed at the child's rate, and any amount above that is taxed at the parent's marginal rate.


Which is Better - UGMA or UTMA?


There is no clear-cut "better" option between UGMA and UTMA accounts. The best choice depends on the specific goals, needs, and asset types of the child's savings and investment plan.


UGMA accounts may be preferable if the plan is to contribute primarily cash and securities. UTMA accounts offer more flexibility if the intent is to gift the child a broader range of assets like real estate or intellectual property.


Ultimately, both UGMA and UTMA accounts can be useful tools to help save and invest for a child's future. The key is to understand the differences between the two and choose the one that best fits your specific circumstances.


DISCLOSURES

DUNHILL FINANCIAL, LLC IS A REGISTERED INVESTMENT ADVISER. THE INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES, INVESTMENTS, OR INVESTMENT STRATEGIES. IT DOES NOT PRESENT THE FULL RANGE OF OPTIONS AVAILABLE TO YOU. INVESTMENTS INVOLVE RISK AND UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED HEREIN.


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