Custodial Accounts (UTMA/UGMA) for Education Savings

A custodial account is an account established at a financial institution for the benefit of a minor child and managed by the parent or another designated custodian. A custodial account is established under a particular state's Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA).

Any money placed in a custodial account is gifted irrevocably to your child. While the child is a minor under the age of 18 or 21 (depending on the state), the money is controlled by the custodian and can be used only for the benefit of the child. Any income earned by the account is taxed to the child (though certain children are subject to the kiddie tax). When the child reaches the relevant age, the custodianship ends and the child assumes sole control of the money.

No separate legal forms or trust documents are required to establish the custodial account.

The custodian must comply with the particular state's UTMA/UGMA statute. Generally, the custodian has broad powers regarding investments and is not accountable to a court (unlike a guardian).

Tip: Once the custodial account is established, there is no limit on who can contribute to it. So, in addition to parents, generous grandparents have a place to transfer money for the college education of their grandchildren.

Caution: State law may limit the types of assets that can be contributed to the custodial account.

Differences between an UTMA account and an UGMA account

There are two differences between an UTMA custodial account and an UGMA custodial account. First, there are differences in what type of property each account may hold. The UGMA authorizes cash, bank accounts, stocks, bonds, mutual funds, and so on. The UTMA broadens these holdings to include real estate and other property, including limited partnership interests.

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