Understanding Trust Accounts for Minors: UGMA, UTMA and Beyond

by Heather

Understanding Trust Accounts for Minors

When planning for a child’s future, setting up trust accounts is a prudent way to ensure financial stability and growth. Among the various options available, the Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are two prominent types of custodial accounts. These accounts allow parents, grandparents, and other adults to transfer assets to minors efficiently, with specific legal protections and tax benefits. However, beyond UGMA and UTMA, there are other trust options that can be tailored to suit different financial goals and circumstances.


Photo courtesy of Canva

UGMA: The Uniform Gift to Minors Act

1. Simplified Asset Transfers:

The UGMA was established to streamline the process of transferring assets to minors. Prior to UGMA, creating a trust was complex and costly. UGMA provides a simpler alternative by allowing assets to be transferred directly into a custodial account managed by an adult custodian.

2. Types of Assets:

UGMA accounts can hold financial assets such as cash, stocks, bonds, and mutual funds. However, they do not accommodate real estate or certain other property types.

3. Custodian’s Role:

An adult custodian manages the UGMA account until the minor reaches the age of majority, typically 18 or 21, depending on state laws. The custodian has a fiduciary duty to manage the assets prudently for the benefit of the minor.

4. Tax Advantages:

UGMA accounts offer tax benefits. The first $1,250 of a minor’s unearned income is generally tax-free, and the next $1,250 is taxed at the child’s tax rate, which is often lower than the parent’s rate. However, income above $2,500 is taxed at the parent’s rate under the “kiddie tax” rules.

5. Irrevocability:

Once assets are transferred into a UGMA account, the transfer is irrevocable. The minor becomes the legal owner of the assets, and the custodian cannot reclaim them.

UTMA: The Uniform Transfers to Minors Act

1. Expanded Asset Types:

UTMA, enacted in the 1980s, extends the types of assets that can be transferred to minors, including real estate, patents, and royalties, in addition to the financial assets allowed under UGMA. This makes UTMA more versatile for diverse estate planning needs.

2. Flexibility in Custodianship:

Like UGMA, UTMA accounts are managed by an adult custodian until the minor reaches the age of majority. However, some states allow the custodianship to extend until the minor is 25, providing additional time for financial maturity.

3. Similar Tax Benefits:

UTMA accounts offer similar tax advantages as UGMA accounts, with favorable tax treatment for the minor’s unearned income. The same “kiddie tax” rules apply.

4. Irrevocable Transfers:

Transfers to a UTMA account are also irrevocable. Once an asset is transferred, it belongs to the minor, and the custodian cannot reverse the transfer.

Beyond UGMA and UTMA: Other Trust Options

1. 529 College Savings Plans:

While not a trust per se, 529 plans are a popular alternative for saving for a child’s education. These state-sponsored plans offer significant tax advantages, including tax-free withdrawals for qualified education expenses and potential state tax deductions for contributions.

2. Coverdell Education Savings Accounts (ESA):

Coverdell ESAs are another education-focused savings option. They allow for tax-free growth and tax-free withdrawals for qualified education expenses, including K-12 expenses, which 529 plans do not cover. However, contributions are limited to $2,000 per year per beneficiary.

3. Traditional Trusts:

For more control and flexibility, families can establish traditional trusts for minors. These trusts can be revocable or irrevocable and offer tailored terms regarding asset management, distribution, and specific conditions that must be met before the minor can access the funds. Two common types are:

– Revocable Trusts:

The grantor can modify or revoke these trusts during their lifetime. They offer flexibility but do not provide immediate tax benefits since the assets are still considered part of the grantor’s estate.

– Irrevocable Trusts:

Once established, these trusts cannot be altered or revoked. They offer substantial tax benefits, as the assets are removed from the grantor’s estate, potentially reducing estate taxes.

4. Minor’s Trusts (Section 2503(c) Trusts):

These trusts are designed specifically for minors and allow for annual gift tax exclusions. The trust must distribute all assets to the beneficiary when they reach age 21. Until then, the trustee has discretion over distributions for the minor’s benefit.

5. Special Needs Trusts:

For minors with disabilities, special needs trusts are crucial. They allow families to provide for the child’s financial needs without disqualifying them from receiving government benefits such as Medicaid or Supplemental Security Income (SSI).


Choosing the Right Option

Choosing the appropriate trust account or savings vehicle for a minor depends on various factors, including the type of assets being transferred, the financial goals, and the desired level of control over the assets. Here are some considerations:

1. Purpose of the Funds:

If the primary goal is to save for education, 529 plans or Coverdell ESAs might be the best options. For more general savings or estate planning, UGMA or UTMA accounts, or traditional trusts, may be more suitable.

2. Tax Implications:

Understanding the tax implications is crucial. UGMA and UTMA accounts offer tax advantages but come with the “kiddie tax” on unearned income. Traditional trusts can provide significant estate tax benefits, especially irrevocable trusts.

3. Control and Flexibility:

Families must decide how much control they want to retain over the assets. UGMA and UTMA accounts transfer control to the minor at the age of majority, which might be too early for some families. Traditional trusts can offer more control and stipulate conditions for distributions.

4. Legal and Administrative Complexity:

Setting up traditional trusts involves more legal work and ongoing administration compared to UGMA and UTMA accounts. Families should consider the associated costs and administrative burdens.


UGMA and UTMA accounts, along with other trust options, offer diverse tools for transferring assets to minors while providing legal and tax advantages. Each option has its unique features and benefits, making it essential to align the choice with the family’s financial goals and needs. Consulting with financial and legal advisors can help families navigate these options and make informed decisions to secure their children’s financial future.

You Might Also Like

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Adblock Detected

Please support us by disabling your AdBlocker extension from your browsers for our website.