Edmit logo

What is an UTMA?

Featured Stories

Filter By Categories

You may have heard the acronym “UTMA” in reference to saving for a child’s college education, but what does it mean?  Most states in the U.S. have enacted a Uniform Transfer to Minors Act (UTMA), which permit adult custodians to establish investment accounts on behalf of child beneficiaries.  Created as the predecessors to 529 plans and Coverdell Education Savings Accounts, UTMA accounts are not explicitly designed as savings accounts for a child’s college education, although many parents utilize them for exactly this purpose.  The main purpose of an UTMA custodial account is to hold and protect assets for a child until he or she reaches the state-defined “majority age”.


Who is Eligible for an UTMA Account?

Any minor can be named as the designated beneficiary of an UTMA account.  The custodian can be the child’s parent, another adult, or a financial advisor or institution.  The donor and custodian need not be the same person or entity.


What Types of Assets Can UTMA Accounts Hold?

UTMA accounts are permitted to hold nearly any type of asset, including stocks, bonds, mutual funds, real estate, intellectual property, fine art, precious metals, or any portion of a family limited partnership.  The ability of UTMA accounts to hold securities and other assets for the benefit of children is one of the main features of this type of account, since minors do not have the right to enter into contracts (which prevents them from directly owning most types of assets).  A custodian of an UTMA account, who has a fiduciary responsibility to manage the account’s assets prudently and for the sole benefit of the minor, is permitted to modify the asset allocation mix of the account at his or her own discretion.


How Can I Establish an UTMA Account?

U.S. banks and retail brokerage institutions can easily facilitate the establishment of UTMA accounts.  Since UTMA accounts are not trust funds, no attorney is needed to prepare trust documents and court appointment of a trustee is not required.  At the time that an UTMA account is established, a custodian and the account’s beneficiary must be named. Custodial ownership may be later transferred; however, the designated beneficiary is fixed and cannot be changed.


How Can I Contribute to an UTMA Account?

Anyone may donate to a child’s UTMA account without limit.  All monies received into an UTMA account are the irrevocable property of the child - they may not later be reclaimed by the custodian or donor(s) under any circumstances.  


How are UTMA Accounts Distributed?

An UTMA account must be “distributed” - i.e., re-registered in the beneficiary’s name - when the beneficiary reaches the majority age as defined by the state.  (This age varies between 18 and 25 depending on the state.) After custody of the account is transferred, the beneficiary may utilize the account proceeds at his or her sole discretion.  Notably, before a beneficiary reaches the majority age, the custodian is permitted to withdraw funds from the account to pay for expenses - such as tuition, tutoring lessons, and computers - that specifically benefit the minor.  Ownership of UTMA accounts, unlike UGMA accounts, may also be transferred through inheritance.


How do UTMA Accounts Affect Financial Aid?

One downside of UTMA accounts is how significantly they impact students’ eligibility to receive financial aid.  Since UTMA accounts are owned by students, rather than parents, the assets held in these accounts are weighted more heavily by the FAFSA’s Federal Methodology in determining a student’s Expected Family Contribution.  A student can expect that approximately twenty percent of the value of an UTMA account will need to be applied to the Expected Family Contribution for every year that the student wishes to receive federal financial aid.


How do UTMA Accounts Affect Taxes?

Donors who contribute to UTMA accounts may do so without limitation; however, all UTMA fund donations count toward the donor’s lifetime gifting limits.  (Donors may still contribute above the maximum lifetime gifting limit, currently set at $11.18 million, but excess contributions above that limit are subject to taxation.)  The assets held in UTMA accounts are not exempt from taxation; however, part of the reason why UTMA accounts are popular is due to the favorable tax treatment that they typically receive.  The first $1,050 of earned income from investments in an UTMA account is usually tax-exempt, and any additional income up to $1,050 is taxed at the child’s (most likely nominal) tax rate. Earned income from an UTMA account above $2,100 is taxed at the greater of the parent’s or the child’s tax rate.


If a custodian dies before transferring an UTMA account to the beneficiary, then the UTMA account may be subject to taxation as part of the custodian’s estate.


Want More Information?

Learn more about 529 college savings plans and Coverdell ESAs, from the experts at Edmit.

Sign up for updates

Popular Tags

Financial Aid and Scholarships* paying for college financial aid Cost of College* grants and scholarships FAFSA Student Loans* Saving for College* college tuition federal student loans cost of attendance 529 plan college financial planning financial aid award expected family contribution taxes private student loans room and board college savings plan on-campus housing college applications application fees merit-based financial aid private universities public universities student loan assistance college expenses federal financial aid merit scholarships edmit hidden gems tuition discount budgeting for college financial need parent PLUS loan Salary and Career* southern colleges CSS profile college costs edmit team education expenses living expenses western colleges financial aid appeal income midwestern colleges off-campus housing affordable college college majors loan forgiveness northeast colleges application fee waivers degree programs edmit scholarship institutional aid loan repayment new england colleges choosing a major net price prepaid tuition plans SAT career choosing a college in-state tuition need-based financial aid need-blind colleges private scholarships qualified higher education expenses repayment plans tuition guarantee work-study 401k ACT UGMA UTMA budget college ranking systems discretionary income education savings accounts fees full ride scholarship grants great lakes region colleges international students investment ivy league schools mid-east region colleges need-aware colleges plains region colleges rocky mountain schools southeastern colleges southwestern colleges tuition payment plans 568 presidents group Inversant MEFA applying to college asset protection allowance best price campus life college advisor college deposit college search college spending concurrent enrollment cost by region cost by state crowdfunding educational expenses esports fee waivers financial literacy fraternities and sororities free tuition full tuition gap year health insurance options home equity loan liberal arts degree line of credit medical expenses military benefits out-of-state students out-of-state tuition percent need met private college consultant retirement savings saving school-based scholarships small business standardized testing state aid state schools student bank accounts student loan debt student organizations title IV schools travel expenses tuition decreases tuition increases tuition reciprocity undocumented students