UGMA vs. UTMA: what’s the difference?

1 min readLast updated December 5, 2023by Rachel Carey

Exploring what they are as well as their similarities, differences, pros, and cons, this article unpacks UGMA vs. UTMA.

Summary 

  • UGMA and UTMA are custodial accounts that allow you to hold assets for minors until they come of age. 

  • UGMA accounts hold cash, stocks, and bonds, while UTMA accounts hold cash, stocks, bonds, and physical assets such as real estate. 

  • UGMA accounts are available throughout the US, while UTMA accounts are not available in South Carolina and Vermont. 

What is a UTMA custodial account?  

UTMA refers to a law that is an extension of the Uniform Gift to Minors Act. This law allows minors to receive gifts without a guardian or trustee’s aid. UTMA custodial accounts for minors allow appointed custodians or the gift giver to manage the account on behalf of the minor until the child reaches their state’s legal age of adulthood. 

You can contribute money, fine art, patents, real estate, and royalties to a UTMA account. The account protects the minor from tax consequences on gifts up to a specific value. It’s important to remember that not all states have adopted UTMA law. UTMA accounts are not allowed in South Carolina and Vermont.  

What is a UGMA custodial account?  

Older UGMA custodial accounts for minors have greater restrictions on what you can contribute to them than UTMA accounts. UGMA accounts are limited to financial assets, including money, annuities, insurance policies, and securities such as bonds, stocks, and mutual funds. 

As with UTMA accounts, an adult custodian manages the UGMA account until the minor beneficiary reaches the legal age of adulthood in their state of residence and assumes full control of the account. While UGMA account-generated earnings aren’t sheltered from tax, they are taxed at a lower rate for minors, up to a specified amount. These irrevocable accounts offer no tax benefits to you or other contributors.  

The act that allows these accounts for minors was developed in 1956 and revised in 1966. The UTMA was finalized in 1986. 

H2: What is the difference between an UGMA and an UTMA account? 

There are several differences between UGMA and UTMA accounts, but there also are a few similarities. Find out what they are below. 

Similarities: 

It’s helpful to be aware of the similarities between these two types of custodial accounts. The main similarities between UTMA and UGMA include: 

  • No contribution limits 

  • Both allow minors to hold stock, bonds, and cash 

  • No tax advantages 

Differences: 

There are a few significant differences between UTMA and UGMA accounts. These include: 

  • UGMA is available nationwide, but UTMA is not available in South Carolina and Vermont 

  • UTMA also allows minors to hold physical assets such as real estate 

  • UGMA termination date: 18; UTMA termination date: up to 25, depending on state law 

What are the pros and cons of UGMA and UTMA accounts?  

UTMA and UGMA custodial accounts have pros and cons. Ensure you’re aware of the positives and negatives of these accounts so you can make an informed decision. 

Pros: 

UTMA and UGMA accounts offer a number of pros: 

  • There are no restrictions on the use of funds: Unlike 529 college savings plans, UGMA and UTMA accounts have no restrictions on how the beneficiary uses the funds once they assume control of the account as an adult. 

  • No contribution or income limits: There are no limits on who can contribute to UTMA and UGMA accounts or on how much money you can contribute, although you will need to file a federal gift tax form for gifts to an individual of $17,000 per year or more. 

  • Multiple investment options: UTMA and UGMA custodial accounts offer you a range of investment options such as bonds, CDs, exchange-traded funds, mutual funds, and complex investment options such as options. 

  • Easy to set up: UGMA and UTMA accounts are much easier and faster to set up than trust funds and other options for investing money for or giving gifts to minors. 

  • Learning opportunities for your child: These accounts can be a good way for your child to start learning about investing for the future. 

Cons: 

You should be aware of the potential cons if you want to fully understand what a UGMA account is: 

  • The money isn’t easy to access: The funds in UGMA and UTMA accounts are not easy to access, as parents or guardians who make withdrawals can only use the money for the minor’s benefit and not for the expenses required of parents. 

  • Fewer tax advantages than other accounts: UTMA and UGMA accounts do not offer pre-tax or post-tax advantages, unlike options such as tax deductions for contributions to 529 education savings plans. 

  • Custodial accounts for minors are irrevocable: You cannot change your mind after opening or contributing to one of these accounts, and you cannot change the account beneficiary’s name. 

  • These accounts might affect financial aid eligibility: Assets held in UGMA and UTMA accounts are given heavier weight than assets in 529 and other education savings plans, which could affect the minor’s eligibility for financial aid, such as federal student loans and need-based grants. 

When do I use an UGMA or an UTMA account?  

If you aren’t sure whether you should use a UGMA vs UTMA account, there are a couple of things you can do to help make a decision. Start by considering key factors, such as the state you live in. If you live in Vermont or South Carolina, you will be limited to a UGMA account, as these states haven’t adopted UTMA. 

Another factor to consider is the type of assets that will be gifted to the minor. If the gifts are limited to cash, stocks, or bonds, you can use either account. However, UGMA accounts are limited to those types of assets, and they are available nationwide. Speaking to a financial advisor can also help you navigate your options. 

How do you open an UGMA or an UTMA account?  

Opening an UGMA or an UTMA account is easy. You can open the relevant account with assistance from a financial advisor at a brokerage firm. 

To establish one of these custodial accounts: 

  • Contact a financial advisor 

  • Appoint a custodian (trustee) 

  • Provide the minor’s name and Social Security number 

Need more information? 

Depending on the state in which you live, the choice between UGMA vs UTMA accounts can take a lot of work. While they both fulfill similar functions, they have significant differences, such as UGMA accounts limiting the asset types that can be held. Ensure you understand the similarities, differences, pros, and cons before making a decision.  

Seek the help of a regulated financial advisor who can guide your financial planning with expert financial advice. Let Unbiased match you with an advisor today.

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.