# Uniform Gifts to Minors Act (UGMA) Account: What It Is and How It Works

> **Definition**
>
> The Uniform Gifts to Minors Act permits adults to transfer cash and/or financial securities to children using a custodial account until the minor reaches the age of majority.

## What Is the Uniform Gifts to Minors Act (UGMA)?

The Uniform Gifts to Minors Act (UGMA) is a law that lets adults (usually parents or grandparents) give assets to a child through a special account. The law was created in 1956 and revised in 1966. Adults are allowed to transfer any type of asset, such as cash, stocks, bonds, mutual funds, and other securities, without setting up a trust. The adult opens the account in the child's name. Any asset held in the account belongs to the child. But the adult is the one who manages it until the child becomes a legal adult in their state. There is some flexibility in the way the funds can be used compared to other accounts, such as 529 plans.

### Key Takeaways

*   The Uniform Gifts to Minors Act is a way for adults to transfer assets to minor children.
*   Assets are restricted to cash and securities, such as stocks and bonds, among others.
*   The account and assets held within it belong to the child but are administered by the adult until the minor becomes of age.

![Uniform Gifts to Minors Act (UGMA) Account](https://www.investopedia.com/thmb/Ty56di1czjQrAy__6aAqXOThHr4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/ugma.asp-final-e587847fbf754e6384c212417653b8e5.png)

*When you give something through the Uniform Gifts to Minors Act, it is irrevocable. This means it legally belongs to the minor and you cannot take it back. — Investopedia / Mira Norian*

## How a UGMA Account Works

A UGMA account functions as a type of custodial account. It's designed to hold and protect assets for the beneficiary. The donor can appoint themselves, another person, or a financial institution to the role of custodian. The custodian has the authority to buy stocks, bonds, mutual funds, and other [securities](https://www.investopedia.com/terms/s/security.asp) on behalf of the minor.

UGMA accounts can be opened through a bank or [brokerage](https://www.investopedia.com/terms/b/brokerage-company.asp) institution. Friends and family can make contributions to the accounts, which carry no contribution or [income](https://www.investopedia.com/terms/i/income.asp) limits. Contributions are made with after-tax dollars, which means donors don't receive an income tax deduction. Deposits are irrevocable. This means that they become permanent transfers to the minor and the minor's account. So, the transfer cannot be reversed.

UGMA assets are typically used to fund a child’s education, but the donor can make withdrawals for just about any expenses that benefit the beneficiary. There are no [withdrawal penalties](https://www.investopedia.com/terms/w/withdrawal-penalty.asp). However, because UGMA assets are technically owned by the minor, they do count as assets if they apply for federal financial aid for college, possibly decreasing their eligibility.

Once they reach the age of majority in their state, minors are granted full access to their UGMA account. At that point, they may use the funds as they please.

> **Important**
>
> Custodians have a fiduciary duty to manage the account in the beneficiary's best interest.

## Special Considerations

The minor or [beneficiary](https://www.investopedia.com/terms/b/beneficiary.asp) is considered the owner of all assets in a UGMA account and the income they generate for tax purposes. But the earnings can be taxed either to the child or the parent. Reporting requirements depend on the amount of income the account generates and the beneficiary’s age.

A UGMA can affect a donor’s lifetime gifting limits for tax purposes. Should a donor who acts as the custodian die before the custodial property is transferred to the minor, the entire custodial property is included in the donor's [taxable estate](https://www.investopedia.com/terms/t/taxableestate.asp).

> **Fast Fact**
>
> Up to $18,000 per individual can be contributed free of gift tax for the calendar year 2024.

## Uniform Gifts to Minors Act (UGMA) vs. Uniform Transfers to Minors Act (UTMA)

The terms UGMA and [Uniform Transfers to Minors Act (UTMA)](https://www.investopedia.com/terms/u/utma.asp) are usually used interchangeably. In fact, the UTMA, which was established in 1986, is an extension of the UGMA. There are some unique similarities between the two, in that they both require that donors name a custodian. This individual manages and invests the assets until the beneficiary comes of age. And both contend that any assets belong to the minor once gifted.

Having said that, there are some distinctions between the UGMA and UTMA. Custodial accounts set up under the UTMA can contain any kind of tangible or intangible asset, including real estate, works of art, and intellectual property. In contrast, UGMA accounts are limited to financial assets, such as cash, stocks, bonds, and insurance products (policies and annuities).

The UTMA allows children to take advantage of investing without having any associated tax burdens. The [gift tax](https://www.investopedia.com/terms/g/gifttax.asp) exclusion provided by the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) was up to $18,000 per person for 2024 ($17,000 for 2023) for a qualifying gift, including gifts to minors.

## UGMA vs. 529 Plans

As noted above, UGMA accounts come with no withdrawal penalties. This means that accounts can be used to pay for various expenses, including the costs to fund an education. But there is another type of account that parents can use to save for their children's studies—notably the [529 plan](https://www.investopedia.com/terms/1/529plan.asp).

A 529 plan is a tax-advantaged savings account that's intended solely for [qualified educational expenses](https://www.investopedia.com/terms/q/qhee.asp), including tuition, equipment, and certain living costs. Originally meant for just post-secondary education, parents can now use 529 plans for any qualified education expenses beginning in kindergarten. It also covers apprentice program expenses.

Here's how they work. Anyone can open an account, including parents and grandparents. Unlike UGMA accounts, there are [contribution limits for 529 plans](https://www.investopedia.com/articles/personal-finance/010616/529-plan-contribution-limits-2016.asp), which vary by state. The limits tend to be very high, so many parents don't have to worry about hitting the ceiling. The money invested in a 529 plan is allowed to grow on a tax-deferred basis. Any withdrawals made from the account are tax-free provided they're used for qualified education expenses.

529 plans come in two different types:

*   **Prepaid Tuition Plans**: These [prepaid plans](https://www.investopedia.com/terms/p/prepaid-tuition-program.asp) lock in future tuition costs at the current rate at specific colleges and universities. As such, account holders can lock in tuition prices and save money in the future.
*   **Savings Plans**: These accounts work just like [individual retirement accounts (IRAs)](https://www.investopedia.com/terms/i/ira.asp).

> **Warning**
>
> UGMAs are usually limited to publicly-traded financial assets, which means they cannot invest in speculative instruments, like derivatives, or buy on margin.

## Advantages and Disadvantages of UGMA

There are a number of benefits and drawbacks that come with using the UGMA to help save for a minor's future. We've listed some of the most common below.

### Advantages

One of the main benefits of having UGMA accounts is that they're simple, easy to understand, and very easy to set up. You can do so through a [financial institution](https://www.investopedia.com/terms/f/financialinstitution.asp) or a [brokerage firm](https://www.investopedia.com/terms/b/brokerage-company.asp). And they can be set up by anyone, including family or friends.  

UGMA accounts come with no contribution limits. Just keep in mind that there's a gift tax imposed by the IRS, which does place caps on how much individuals can set aside as a [gift](https://www.investopedia.com/terms/g/gift.asp) to others. Similarly, there are no withdrawal limits or restrictions. This means that money can be taken out at any time and for whatever reason.

There's more flexibility when it comes to how you can use a UGMA account. Unlike other plans, you aren't limited to using the funds or assets for things like education.

One of the biggest advantages is that they allow parents and others to skip the [trust](https://www.investopedia.com/terms/t/trust.asp) process. The assets placed within a UGMA account automatically become the property of the minor, which means there's no question of ownership.  

### Disadvantages

All UGMA accounts are irrevocable. As such, once you transfer assets to the account, they become the property of the minor and are no longer yours. This means that you can't change your mind, so once the transfer is complete, it's there for good.

UGMAs can be used against the beneficiary if they want to get any type of financial aid in the future, including student loans. That's because they're considered the child's [property](https://www.investopedia.com/terms/p/property.asp). If the value of the account is fairly substantial, it may decrease the amount of aid they may receive—if they get any at all.

There are no tax benefits to owning a UGMA account. The IRS doesn't allow any [tax credits](https://www.investopedia.com/terms/t/taxcredit.asp) or [tax deductions](https://www.investopedia.com/terms/t/tax-deduction.asp) for setting aside money in a child's UGMA like it would for a 529 plan.  

Pros

*   Easy to understand and set up
    
*   No contribution and no withdrawal limits
    
*   Provides more flexibility  
    
*   Skips the trust process
    

Cons

*   Irrevocable
    
*   May change or eliminate eligibility for financial aid
    
*   No tax advantages
    

## Contribution Limits and Taxes

As noted above, there are no actual limits to how much you can contribute to a UGMA account. But there's an important consideration when it comes to these types of accounts: Anything you contribute to your child's UGMA account may be considered a gift.

The IRS puts [caps](https://www.investopedia.com/terms/c/cap.asp) on how much anyone can gift another individual. For 2024, parents can gift as much as $18,000 to their children without any tax consequences. That amount was adjusted for [inflation](https://www.investopedia.com/terms/i/inflation.asp) from $17,000 for the 2023 tax year.

But what about [taxation](https://www.investopedia.com/terms/t/taxation.asp)? Under certain circumstances, parents may report their children’s UGMA accounts on their own tax returns and take advantage of the [kiddie tax](https://www.investopedia.com/terms/k/kiddietax.asp) or the Tax on a Child's Investment and Other Unearned Income. This means that parents can report their child’s income on their own [tax return](https://www.investopedia.com/terms/t/taxreturn.asp) if the child's unearned income, including UGMA earnings, was less than $2,500 in 2023 and they were no older than 19 (or 24 if a full-time student).

In this case, the first $1,250 of the child’s unearned income is treated as tax-free. The next $1,250 is taxed at the child’s tax rate. Anything exceeding $2,500 is taxed at the parent's [tax rate](https://www.investopedia.com/terms/t/taxrate.asp). If such an election isn't made or if the child’s [unearned income](https://www.investopedia.com/terms/u/unearnedincome.asp) exceeded $2,500 at the end of the tax year, the minor would have to file a tax return subject to “kiddie tax” rules.

## How Are Gifts to Minors Taxed?

[Financial gifts](https://www.investopedia.com/articles/personal-finance/121313/great-financial-gifts-kids-christmas.asp) in the amount of up to $18,000 in 2024 are exempt from taxes. Gifts in any amount over this amount per year will be taxed.

## What Is a Downside to the Uniform Gifts to Minors Act?

As the assets in a UGMA account are owned by the minor, this can reduce the amount of financial aid they may receive. If the balance of the UGMA account's too high, it may disqualify them completely from any financial aid. This is true even if they haven't reached the age of majority and can't access the account until a certain date.

## Where Can I Open a Uniform Gifts to Minors Account?

A Uniform Gifts to Minors account is an easy-to-understand vehicle that can be opened at a brokerage institution or a bank. Anyone can contribute assets to these accounts. One thing that depositors should remember is that whatever they put into the accounts becomes irrevocable and the property of the beneficiary.

## The Bottom Line

There are many ways that parents and others can help secure the financial futures of their children or other minors. The UGMA provides one way to do so. UGMA accounts are easy to open and understand and allow individuals to contribute cash and other assets to a single underaged beneficiary. They're designed to be very flexible because individuals can use them for any purpose. But there are a few caveats to these types of accounts that parents should understand. There are no tax benefits and deposits become irrevocable as soon as they're made. If you're unsure of whether this type of account is right for your beneficiary, make sure you consult a financial professional to help guide you.

> **Article Sources**
>
> 1.  Social Security Administration. "[Program Operations Manual System (POMS)](https://secure.ssa.gov/poms.NSF/lnx/0501120205)."
>     
> 2.  Western & Southern Financial Group. "[What Is a UGMA Account? How Does It Work?](https://www.westernsouthern.com/investments/ugma-account)"
>     
> 3.  FINRA. "[FINRA Reminds Member Firms of Their Responsibilities for Supervising UTMA and UGMA Accounts](https://www.finra.org/rules-guidance/notices/20-07)."
>     
> 4.  FINRA. "[Saving for College: UGMA and UTMA Custodial Accounts](https://www.finra.org/investors/insights/saving-college-ugma-and-utma-custodial-accounts)."
>     
> 5.  Fidelity. "[Must-Know Facts About UGMA/UTMA Custodial Accounts](https://www.fidelity.com/learning-center/personal-finance/custodial-account-for-kids)."
>     
> 6.  Federal Deposit Insurance Corporation. "[Fiduciary Accounts](https://www.fdic.gov/deposit/diguidebankers/documents/fiduciary-accounts.pdf)."
>     
> 7.  Internal Revenue Service. "[IRS Provides Tax Inflation Adjustments for Tax Year 2024](https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024)."
>     
> 8.  Internal Revenue Service. "[Topic No. 313 Qualified Tuition Programs (QTPs)](https://www.irs.gov/taxtopics/tc313)."
>     
> 9.  Internal Revenue Service. "[Topic No. 553 Tax on a Child's Investment and Other Unearned Income (Kiddie Tax)](https://www.irs.gov/taxtopics/tc553)."
>     
> 10.  Internal Revenue Service. "[RP - 2021-45](https://www.irs.gov/pub/irs-drop/rp-21-45.pdf)," Page 8.
>      
> 11.  Internal Revenue Service. "[Internal Revenue Bulletin 2022-45](https://www.irs.gov/irb/2022-45_IRB)."