« Blog
What are the benefits and drawbacks of an UGMA / UTMA?
Founder & CEO

UGMA / UTMA accounts can be good for some things, bad for others.

Here's what you need to know to make sure that an UGMA / UTMA account does what you'd want it to do for you & your family.

If your goal is to save for college and you aren’t sure which strategy is right for you, our interactive college savings guide will walk you through the best options for families like yours.

Know that in most states today you'd open an UTMA (not an UGMA). UTMA (Uniform Transfers to Minors Act) has replaced UGMA (Uniform Gifts to Minors Act) in most states. The main "upgrade" is greater flexibility - UGMAs only hold securities, UTMAs can hold securities and others assets, such as real estate.

Quick Overview of How UGMA / UTMAs work

We're going to focus here on situations with a dependent child under age 19 (or under age 24 if a full-time student) who does not have earned income (they're not working for pay) and their income is entirely unearned income, meaning income from investments.

The basic idea of UGMA / UTMAs is:

The first $1,050 of unearned income is tax-free.

If this is the only income a dependent child has, then the child does not even need to file a return.

The next $1,050 of unearned income is taxed at the child's rate*

*10%, if you elect to include the child's income on your own return (regardless of composition of the earnings)

If, instead, you choose to have the child file their own return, their tax rate will depend on their tax bracket and the composition of their unearned income...just like a grown-up. Their rate on this "next $1,050" could be anywhere from 0% (if all income qualifies for long-term capital gains and your child is also in the lowest tax bracket) to the child's ordinary income rate (if their unearned income does not qualify for capital gains treatment).

Any income above that cumulative $2,100 of unearned income is taxed as if it had been recognized on the parent's own return.

Note: you'll sometimes hear that income over $2,100 is "taxed at the parent's rate"  - this can be confusing because it begs the questions, "which rate? Income or capital gains?"

The way the calculation actually works is that the parent figures how much tax they would owe if the amount above $2,100 had been recognized on their own return. Then the parent looks at their actual tax due (without the add-on of the child's excess unearned income). The difference between those two numbers is the child's tax. 

So you effectively don't end up any "worse off" from a tax perspective than if you'd just put the money in a plain old brokerage account for yourself. But there's no tax benefit to you, either (and you give up a lot of flexibility, more on this below).

UGMA / UTMAs are usually NOT your best option if...

...You plan to apply for financial aid.

UGMA / UTMAs count as student assets, which are weighted 20% in FAFSA calculations, meaning students will be expected to draw down 20% of the UGMA / UTMA to finance their educations each year. Contrast that with 529 plans, which - when owned by a parent - are weighted at 5.64% at most (weighting varies with income and asset levels, but a 529 plan cannot be weighted more than 5.64%).

When this doesn't matter: you expect to use the funds long before college.

Example: A beloved grandparent sets up an UGMA / UTMA, and expresses to you their hope that you'll use the money to finance extracurricular lessons and summer camp. If you expect to use this money long before college, then the financial aid weighting shouldn't be a problem.

In terms of timing, FAFSA will ask the student to state their net worth as of the date the FAFSA application is submitted. So an UGMA / UTMA with an account balance of zero on that date should not "show up" in FAFSA's net worth calculation.

However FAFSA applicants for aid in the 2017-2018 school year are required to use 2015 returns. This is a new FAFSA policy to use tax returns from two years prior to the start of the school year when disclosing income numbers. So if you recognized significant investment income from an UGMA / UTMA two years ago, that will show up on your FAFSA.

...You plan to save a good chunk of money in the account, and have not maxed out other, more tax-advantaged accounts that could be helpful to you.

Going to back to what we discussed above: if unearned income is more than $2,100 for your dependent child, the overage will be taxed as if you'd recognized that income on your own return.

So how big an account produces $2,100 unearned income?

It depends on what you're invested in and how much those investments earn. You can pick your own expected rate of return, but a reasonable assumption for a "mostly equities, some fixed income" portfolio might be 6%. If that's the case, $35,000 would produce $2,100 unearned income. 

You might note that gains wouldn't necessarily be realized each year, so perhaps the unearned income would show up as less. The problem with that is that you're just delaying your "day of reckoning" when you do have to recognize your gains. The year when you decide to harvest those gains, you'll blow through that $2,100 and owe tax as if it had been in your own brokerage account.

Not a terrible outcome, but perhaps a suboptimal one if you were not max'ing out your desired savings levels in a more tax-advantaged vehicle, like a 529 plan (or even your own IRA).

...Your main goal is saving for college.

We just talked about how UGMAs / UTMAs are not a great choice if you're planning to apply for financial aid. And they're not a great choice if you're planning to save a lot of money because there's no tax advantage above $2,100 of unearned income. 

Most people saving for college do one - or both - of these things.

Therefore, the odds that an UGMA / UTMA is your best choice for saving for college are low.

...You don't love the idea of your child controlling the assets sometime between the age of 18 & 21...or in some states, you can choose age 25

UGMA & UTMA accounts transfer control of the assets to the child at the age of termination.

The exact age will depend on what state you're in, whether you have an UGMA or UTMA, and whether the way that the custodial account was set up offered any choice to choose a particular age (for example, in California and Nevada it's possible to elect age 25, but you have to get the wording right).

Age 25 is typically more mature than 18, but the point is the same: the child is getting full control of the funds at a point in time where maturity is often not at a pinnacle.

When this doesn't matter: you are confident you can spend the money in appropriate ways that benefit the child prior to them reaching age of termination.

...You don't love the idea of making impossible-to-reverse gifts to one particular child

Contributions to an UGMA / UTMA are irrevocable, meaning you can't undo them. You also can't change beneficiaries. 

So if one of your kids drops out of college and becomes a big YouTube star and the other pursues and MD/PhD, there's no transferring money between kids. (This sort of transfer is easy with 529 plans.)

...You expect to have more than $1,050 in earnings and the idea of more complexity on your annual tax filings makes you want to scream

Above $1,050 unearned income, you need to make a tax filing.

You might be able to include the income on your own return (check out additional resources at the end of this post), but that process still requires some effort.

That effort might save you money, you have to look at what you'd actually save. We'll give some examples below.

If you’re saving for college and ready to explore other options, our interactive college savings guide will help you decide what’s best based on your situation and goals.

UGMA / UTMAs can be GOOD choices for...

...Paying for pre-college expenditures that benefit the child (private school, sports & music lessons, etc.)

Any expenditures from an UGMA / UTMA are legally required to be for the benefit of the child and - importantly - not be considered part of parental obligations.

Parents are obligated to feed, house and clothe their children. Therefore you cannot use UGMA / UTMA money for food, housing and clothing.

Parents are not obligated to pay for private school or sports or music lessons. But you could make a good case that your chosen private school and extracurricular lessons benefit your child. Therefore, private school and extracurricular lessons are among the good uses of UGMA / UTMA funds.

...Transferring smaller amounts of money to a child, or money that is intentionally invested at a low rate of return.

If you expect investment income under $1,050, no tax will be due at all.

Between $1,050 - $2,100 it is taxed at the child's rate (or a flat 10%, if you elect to include the child's income on your return).

...You want flexibility in how the money is spent

529 plans and Coverdell Education Savings Accounts offer greater tax advantages than UGMA / UTMAs for saving larger amounts of money, but they all require expenditures on education.

If you want an account that offers more flexibility in how you spend the money, an UGMA / UTMA might be the right fit.

...You want flexibility in how the money is invested

UGMA / UTMAs give you a lot of flexibility in how you invest the money.

Be careful to not delude yourself into thinking that you're going to generate long-term value by picking which of Google or Apple will do better next year. But sometimes investment flexibility is helpful.

 ...Holding life insurance proceeds

There are many ways to hold life insurance proceeds for the benefit of a minor, including having an irrevocable or revocable trust.

But a cheaper, easier way can be to name as beneficiary your chosen custodian.

Confirm with your insurance broker and insurance company that this wording will work for you in your state, but you can list a beneficiary something like this:

"[Name of custodian who's an adult you trust very much], custodian for [name of minor child] under Uniform Transfers to Minors Act (UTMA)"

That chosen guardian could then go open an UTMA account to deposit your life insurance proceeds for the benefit of your child.

You've penciled out what your tax savings would be, you've contemplated the incremental tax filing effort, and you feel it's "worth it" to you

If you were in the highest tax bracket, the most you could save is $726.60 / year, assuming you move the max $2,100 income that would have been taxed at your rate of 39.6% to your child's rate of 0% on the first $1,050 & 10% on the next $1,050.

Here's the math:

$415.80 / year (= $1,050 * [39.6% - 0%])

$310.80 / year (= $1,050 * [39.6% - 10%])

= $726.60 / year 

If we looked at a more common 28% income tax rate bracket (15% capital gains), the maximum potential annual savings would be $483 / year.

Here's the math:

$294 / year (= $1,050 * [28% - 0%])

$189 / year (= $1,050 * [28% - 10%])

= $483 / year

Keep in mind the numbers are only this big if you're "moving" unearned income taxed at ordinary income rates (e.g. corporate bond interest), not unearned income taxed at long-term capital gains rates (qualified dividends, long-term capital gains).

Because long-term capital gains rates are lower than ordinary income tax rates, "moving" long-term capital gains assets to an UGMA / UTMA  offers a smaller benefit.

In practice, you're not going to precisely hit $2,100. There will be some overage, you or your tax advisor will need to handle that additional complexity.

Only you can decide if that's "worth it" for you.


Nice work! You learned all about UGMA / UTMAs! As your reward, here are some helpful original sources from the IRS that are great if you're actually setting up an UGMA / UTMA.

Additional resources for filing a child's taxes (in the order I'd suggest looking at them)

IRS: Kiddie Tax <-- helpful overview, good place to start

IRS Publication 929: Tax Rules for Children and Dependents <-- the details! Not a bad read, if you like this kind of thing...definitely check this out before going further 

Form 8814: Parents' Election to Report Child's Interest and Dividends <-- if you decide to include the child on your own return, rather than have them file a separate return...if you're unsure you can, Publication 929 has a cool flow chart for that!

Form 8615: Tax for Certain Children Who Have Unearned Income <-- check out Publication 929's other cool flow chart to see if you need to file this, but if your child had more than $2,100 unearned income, the odds are good you will

Form 8615 Instructions <-- b/c you can't just make the numbers up!

Want clear, honest info about saving for college?
Check out our interactive guide tailored to your situation and goals.
Go to our College Savings Guide
Wallis is the Founder & CEO of AboveBoard Financial, a company reinventing investment advice and insurance with revolutionary transparency and honesty. Wallis spent over 10 years at Goldman Sachs as an investment banker and hedge fund investor in financial institutions. She founded AboveBoard to cut through the BS and present important choices with clarity and compassion. Wallis lives in New York City with her husband and two young children.

Want clear, smart financial advice?

Subscribe to our newsletter.

Your privacy is important to us. We never share your information with anyone.