UGMA/UTMA Custodial Accounts: Invest for Kids & Teach Financial Literacy
Parents (and business owners), have you wondered how to introduce savings, investing and financial management to your young child in real time? A custodial account could be a useful tool in their education. A parent, guardian, or other adult can open a custodial account on behalf of a minor. Within this account, the custodian can invest in individual stocks and bonds, mutual funds, ETFs, among other investment options. The funds can be used for any purpose, not just education. If your primary intent is for college education, then consider a Coverdell Education Savings Account or 529 College Savings Plan.
Let’s take a quick look at the history and purpose of the custodial accounts. The accounts are governed by legislation and adopted by all U.S. states. The Uniform Gift to Minors Act (UGMA) was passed in 1956, then later superceded by the Uniform Transfer to Minors Act (UTMA) in 1986. The UTMA broadens the types of investments that can be in the account to include those listed in the UGMA plus real property, collectibles, and intellectual property. All 50 states offer the UGMA accounts, and 48 states offer the UTMA accounts (South Carolina and Vermont are UGMA only). The age of termination also varies between these two account options. The age of termination for the UGMA account is traditionally age 18, and the UTMA account is typically age 21. In states that offer both accounts, the custodian selects which type of account to open - shorter time frame with more traditional investment options, or longer custodial time frame with an expanded list of investment options. Either account must be opened with the best interest of the minor in mind. That’s the whole premise and intent of these accounts.
Custodial accounts can be opened at most major financial institutions, including a few robo advisors. Here is a list of some institutions. The nature of the custodial account is for investment/wealth transfer/wealth accumulation, so the annual return is significantly higher than a savings account. With regular contributions to the account throughout the child’s life, the total balance upon transfer can be life changing and open meaningful choices for the child. The child, now an adult, can decide about their education, housing, and initial lifestyle because the resources are available. Consider how many financial principles can be covered while the account is growing - saving and investing habits, understanding time horizon, demonstrating present and future value of money, compound interest, inflation and taxes. What a valuable financial education that increases the odds that the young adult has a better chance of making quality financial decisions. Just remember to discuss how to budget!! Let’s make that money last. 🙂 Check out this calculator on the Acorns website for custodial accounts. You can manipulate the contribution amount, frequency and rate of return to estimate the future value of the account (if all things transpire exactly as input.)
Technically, there are no contribution limits, but any amount over the annual gift limit can trip tax consequences. (Note: 2026 gift exceptions are: $19,000 per recipient for single individuals and $38,000 per recipient for married couples.) Consider those exclusions as you plan your annual gifting. It is worth a conversation with a financial planner to dig into how a custodial account can fit into your wealth transfer plan. Anyone can contribute to the custodial account, but it needs to be understood that any funds in this account are assets of the minor. No take backs allowed. The moment the funds are deposited into that account, the custodian cannot have them back. Any withdrawals made while the child is a minor have to be for the benefit of the minor. Another factor to consider is the state in which the account was opened. That will determine the age of majority for the minor and the age of termination for the funds to be transferred to the now adult. This can be complicated if the custodian lives in a different state than the minor. It could mean the difference between the age of termination being 18 or 25. Sure, more funds can be accumulated longer, but it also delays when the child can access them. Perhaps delay is in the best interest of the minor. That should be thought through from the beginning, especially if the custodian isn't the minor's parent or legal guardian.
Hopefully you know more about custodial accounts at the end of this than you did at the beginning. That’s our goal! A custodial account can be a powerful tool in your financial plan. Feel free to connect with us at any time either via email or on the socials. And you can drop into one of our bi-weekly SM office hours to discuss business or personal finance. Love to see you and figure out how we can help. Until we meet, keep working on the change.
Resources:
https://investor.vanguard.com/accounts-plans/ugma-utma
https://us.etrade.com/what-we-offer/our-accounts/custodial-account?icid=et-global-custodialcard-learnmore
https://www.fidelity.com/open-account/custodial-account
https://www.schwab.com/custodial-account
https://www.nerdwallet.com/investing/learn/what-is-a-custodial-account