Custodial accounts under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) are accounts created under a state’s law to hold gifts or transfers that a minor has received. The accounts are managed by a custodian, and once a gift or transfer is made to an account, the gift or transfer cannot be revoked. Because the minor owns the assets in the account, the account is held and reported under the minor's Social Security number (SSN).
Any adult resident of the U.S. can open or contribute to an UGMA or UTMA. The custodian named on the account and the person(s) making the gift or transfer can be the same person, but don't have to be. Because the minor owns the assets in the account, the account is held and reported under the minor's Social Security Number (SSN), so the investment earnings are taxed as the minor's income.
Key benefits of an UGMA/UTMA
There are no limits on the dollar amount of gifts or transfers that can be made to an UGMA or UTMA, but amounts above $18,000 per year ($36,000 for a married couple filing jointly) will incur federal gift tax.
Unlike college savings plans, there is no penalty if account assets aren't used to pay for college. Once the minor reaches adulthood, the money is turned over to the minor and the minor will have full control of the assets and can use them for any purpose—educational or otherwise.
Points to consider
- UGMAs and UTMAs are custodial accounts with assets owned by the minor. Contributions (gifts or transfers) into UGMAs and UTMAs cannot be revoked, and the minor beneficiary cannot be changed. Once the minor reaches adulthood (which depends on the law of the state that governs the UGMA or UTMA), the custodian must turn over all the assets remaining in the account to the former minor.
- Any adult family member, court-appointed guardian, or organization can agree to act as custodian of the account. The custodian must reside in the United States or a U.S. territory and be either a U.S. citizen or resident alien.
- A custodian may designate a successor custodian or name a limited agent to act on their behalf.
- State rules vary for account registration and age of majority (i.e., when the minor is considered an adult) and the age when the custodianship must terminate.
- If allowable by a state’s law, the person creating the UGMA/UTMA can add a customized age of termination. Please contact Vanguard for further information.
- There could be a significant impact on federal financial aid for college as assets in the account are owned by the minor.
- Contributions aren't tax-deductible.
- Earnings are subject to federal and potentially state and local taxes.
A Vanguard UGMA/UTMA offers you more
TIP
You can move an UGMA/UTMA held at another company into a Vanguard UGMA/UTMA or Vanguard 529 Plan account. Note that such a transaction may be a taxable event.
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Jump-start saving for a special person in your life.
We’re here to help. Have questions?
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