How UGMA and UTMA Accounts Differ

Key Takeaways 

• Both the UGMA and UTMA function as a type of custodial account and are designed to protect and hold assets for the beneficiary. 

• UGMA and UTMA account custodians can be the donor, another individual, or a bank, brokerage, or other financial institution. 

• A UTMA allows a broader range of assets to irrevocably go into the account, including real estate, money, patents, or royalties, for example.

For the vast majority of people who have children, their wellbeing is paramount. For better long-term planning, they are increasingly turning to custodial accounts to secure financial assets for minors.

Below is a demystification of the differences between accounts created by the Uniform Gifts to Minors Act (UGMA), and those under the Uniform Transfers to Minors Act (UTMA). By understanding each account type’s nuances, investors can strategically choose the best option for their circumstances. 

What is UGMA? Definition and Purpose

The UGMA, which was established in 1956 and revised a decade later, is a type of custodial account that permits adults to give or shift assets to underage beneficiaries. Designed to protect and hold assets for the beneficiary, it offers an irrevocable means of transferring assets to a minor that is less expensive and time consuming than establishing a formal trust.

The account custodian can be the donor, another individual, or a bank, brokerage, or other financial institution. It permits the custodian, which is appointed by the donor, to buy securities or insurance products on behalf of the minor. Cash may also be contributed.

While account earnings are not tax sheltered, they are taxed either to the child or the parent at the minor’s lower rate, up to a certain amount. Reporting requirements hinge on the beneficiary’s age and the amount of income the account produces.

Further, there are no limits on contributions, which can be made by friends or family. Because contributions are made with after-tax dollars, donors get no income tax deduction. For 2026, individuals can contribute up to $19,000 free of gift taxes.

Typically, UGMA assets are used to pay for a minor’s education. However, donor withdrawals are allowed for any expense that benefits the beneficiary and there are no withdrawal penalties. 

Once the minor reaches the age of majority in their state, they are granted full access to their account and may use the funds as they wish.

Note that if a donor who acts as a custodian dies before assets are shifted to the beneficiary, the entire custodial property goes to the donor’s taxable estate. In this way, setting up a WGMA is part of estate planning.

What is UTMA? Definition and Purpose

Established in 1986, the UTMA is an extension of the UGMA and allows minors to receive gifts without the aid of a guardian or trustee. Here, a broader range of assets can irrevocably go into the account, including real estate, money, patents, or royalties, for example. That could affect which account type an investor chooses.

Account-generated UTMA earnings are not sheltered from taxes. However, they are taxed at a reduced rate for minors, up to $2,700 for 2026. After that, earnings are taxed at the donor’s marginal tax rate.

There are no tax advantages and no contribution limits for these accounts, and minors may hold securities. Also, each state may choose to amend or adopt its UTMA. UTMAs are unavailable in Vermont and South Carolina. 

Until the minor takes possession, account assets are counted as part of the donor’s taxable estate.

Key Differences Between UGMA and UTMA

While UGMA and UTMA are very similar, they are not interchangeable. In fact, there are distinct differences:

• Asset types allowed. While UGMA accounts are limited to financial assets such as money, securities, annuities, or insurance, UTMA can contain any sort of intangible or tangible asset, including intellectual property, art, and real estate.
• Age of majority. The age for both accounts vary by state, but they are typically 18 or 21.
• Contributions and limits. There are no limits for each account type. For a UGMA or UTMA, the gift tax exclusion is up to $19,000 per person for 2026. For a UGMA, parents may report their child’s income on their own taxes if the minor’s unearned income stays within IRS limits. Account‑generated UTMA earnings are not sheltered from taxes. However, they are taxed at a reduced rate for minors, with the first $1,350 tax‑free, the next $1,350 taxed at the child’s rate, and amounts above $2,700 taxed at the parents’ rate for 2026.
• Account management flexibility. Money can be used for anything, not just education.

Advantages and Disadvantages of UGMA Accounts

There are a number of potential benefits and drawbacks that come with participation in a UGMA.

Advantages

• Simple and easily established by family or friends.
• No contribution limits. However, contributions are considered a gift, upon which the IRS places tax caps. 
• No withdrawal limits.
• No restrictions on fund use.
• Permits parents and others to forego the trust process.
• Available in every state.

Disadvantages 

• Accounts are irrevocable. The custodian cannot change their mind.
• Can count against beneficiary financial aid, such as a student loan.
• No tax benefits to owning an account.

Advantages and Disadvantages of UTMA Accounts

Likewise, there are potential benefits and disadvantages with UTMA accounts, including:

Advantages 

• A UTMA account can also invest in real estate or other property.
• No contribution limits or withdrawal limits
• No need to establish a trust.
• Assets are safe from creditors, family members, or other third parties.
• Keeps assets out of the hands of teens

Disadvantages 

• Recipients may be less eligible for college financial aid.
• In some jurisdictions, an account may only be transferred over with the custodian’s permission when the child turns 18. When the minor turns 21, assets are automatically transferred.
• Unavailable in South Carolina and Vermont.
• There are some restrictions, such as irrevocability. 
• Potential for mismanagement if the beneficiary gains control too early.

Which Account is Best for You?

Consider the type of assets that will go to the minor. If the gifts are limited to stocks, bonds, or cash, either account may be used. UGMA accounts, though, are limited to such asset types. So, which account one chooses can heavily depend on the assets involved. 

In addition to asset types, other factors should include state laws and the minor’s maturity. Also, note that UTMA accounts are not permitted in Vermont and South Carolina. 

A financial consultant can help with choosing the best account for each person’s situation.

UTMA and Alternatives

As noted, UGMA accounts only permit investments in securities, insurance, and cash. By contrast, UTMA accounts also allow for alternative investments such as art or real estate, which can generate passive income and tax-favorable returns.

Increasingly, investors are turning to the private market to protect against inflation and counter stock market volatility. Going back nearly two decades, the private market has topped the S&P 500 in every downturn.

Alternative Investments and Portfolio Diversification

Alternatives can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. That also meant the potentially exceptional gains these investments presented were also limited to these groups.

Platforms like Willow Wealth provide curated access to private markets for individual investors. While the risk remains, these platforms offer opportunities across real estate, private credit, private equity, and more.

Investors can get started with minimum investments as low as $5,000 for their first investment (subject to certain exceptions). Willow Wealth offers curated investments across multiple asset classes, with options ranging from individual investments to diversified funds and automated portfolio solutions.

Learn more about the ways Willow Wealth can help diversify and grow portfolios.

Summary 

Investors can use this as a guide to help them choose between UGMA and UTMA accounts. Before deciding between them, they should factor in all the differences and potential benefits and considerations. Ultimately, it should come down to individual circumstances and financial goals.

Investors should remember, too, that UTMA accounts allow the inclusion of increasingly popular alternative investments, which can provide portfolio diversification and possibly consistent passive income.