Uniform Gifts to Minors Act (UGMA) Accounts

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on July 12, 2023

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What Are Uniform Gifts to Minors Act (UGMA) Accounts?

UGMA accounts are custodial accounts established under the Uniform Gifts to Minors Act, allowing adults to transfer assets to minors without the need for a formal trust.

These accounts are used primarily for funding a minor's education, but the funds can also be used for any purpose that benefits the minor.

UGMA accounts provide a simple and tax-efficient way to transfer assets to minors. The benefits of UGMA accounts include reduced gift tax implications, the ability to invest in various assets, and flexibility in using the funds for the minor's benefit.

Legal Framework of UGMA Accounts

Uniform Gifts to Minors Act

The UGMA is a set of laws that provide a legal framework for transferring assets to minors. Each state in the United States has adopted its version of the UGMA, with slight variations in the rules and regulations.

State Adoption and Variations

UGMA accounts are governed by state law, and each state has its version of the UGMA. It is essential to familiarize yourself with the UGMA rules in your state to ensure compliance with the regulations governing these accounts.

Establishing and Funding UGMA Accounts

Account Registration and Setup

To establish an UGMA account, an adult (typically a parent or grandparent) opens the account as the custodian on behalf of the minor, known as the beneficiary. The custodian is responsible for managing the account until the minor reaches the age of majority, which varies by state.

Types of Assets Allowed

UGMA accounts can hold various assets, including cash, stocks, bonds, and mutual funds. Some states also allow other types of assets, such as real estate and collectibles, but this varies depending on the state's version of the UGMA.

Contributions and Gift Tax Implications

Contributions to UGMA accounts are irrevocable gifts to the minor and may be subject to federal gift tax if they exceed the annual exclusion limit. However, the donor can take advantage of the gift tax exclusion by contributing up to the limit each year.

UGMA Account Management

Role of the Custodian

The custodian is responsible for managing the UGMA account on behalf of the minor. This includes making investment decisions, tracking account performance, and filing taxes for the account. The custodian has a fiduciary duty to act in the best interest of the minor.

Investment Options and Strategies

UGMA accounts offer a wide range of investment options, including stocks, bonds, and mutual funds. The custodian should choose investments that align with the minor's financial goals, time horizon, and risk tolerance.

Taxation of UGMA Accounts

UGMA accounts are subject to taxation at the minor's tax rate. Investment income, such as interest, dividends, and capital gains, are taxed to the minor. However, a portion of the investment income may be tax-exempt or taxed at a lower rate, depending on the child's age and income level.

Withdrawals and Distributions From UGMA Accounts

Permissible Uses of Funds

Funds in an UGMA account can be used for any purpose that benefits the minor, such as education expenses, housing costs, or medical expenses. The custodian must ensure that withdrawals from the account are used for the minor's benefit.

Restrictions on Withdrawals

The custodian cannot withdraw funds from the UGMA account for their own use or benefit. Additionally, once the minor reaches the age of majority, they gain full control over the account, and the custodian can no longer make decisions or withdrawals on their behalf.

Tax Consequences of Distributions

When funds are withdrawn from an UGMA account, the minor may be subject to taxes on the investment income generated by the account. The tax consequences depend on the type of income, the minor's age, and their overall income level.

UGMA Accounts and Financial Aid

Impact on Financial Aid Eligibility

UGMA accounts can affect a minor's eligibility for need-based financial aid, as they are considered an asset of the student when calculating the Expected Family Contribution (EFC). A higher EFC may result in reduced financial aid awards.

Strategies to Minimize the Impact on Financial Aid

To minimize the impact of UGMA accounts on financial aid eligibility, some families may choose to spend down the account on educational expenses before applying for financial aid or transfer the assets to a different savings vehicle, such as a 529 college savings plan.

Alternatives to UGMA Accounts

Uniform Transfers to Minors Act (UTMA) Accounts

Uniform Transfers to Minors Act (UTMA) accounts are similar to UGMA accounts but allow for a broader range of assets to be held, including real estate and collectibles. UTMA accounts may be a suitable alternative for those looking to transfer non-financial assets to a minor.

529 College Savings Plans

529 college savings plans are tax-advantaged investment accounts specifically designed for education savings. Unlike UGMA accounts, 529 plans have no impact on financial aid eligibility and offer more significant tax benefits, making them an attractive alternative for college savings.

Coverdell Education Savings Accounts (ESAs)

Coverdell ESAs are another tax-advantaged savings vehicle for education expenses. While they have lower contribution limits than UGMA accounts and 529 plans, they can be used for both K-12 and college expenses, offering additional flexibility for families.

Alternatives to Uniform Gifts to Minors Act (UGMA) Accounts


UGMA accounts are custodial accounts that allow adults to transfer assets to minors for their benefit. They offer tax advantages, flexibility in investment options, and can be used for various purposes.

However, UGMA accounts can impact financial aid eligibility, and there are alternative savings vehicles to consider based on the specific financial goals of the minor.

Understanding UGMA accounts is essential for those looking to transfer assets to minors, as they offer a simple and tax-efficient way to save for a minor's future.

Familiarizing yourself with the legal framework, management, and taxation of UGMA accounts can help ensure compliance and effective account management.

Selecting the appropriate savings vehicle for a minor depends on the family's financial goals, risk tolerance, and preferences.

By considering the various options, such as UGMA accounts, UTMA accounts, 529 plans, and Coverdell ESAs, families can make an informed decision about the best way to invest in a minor's financial future.

Uniform Gifts to Minors Act (UGMA) Accounts FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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