By Harry Prabandham · Updated September 28, 2026
Personal Finance
UGMA and UTMA Custodial Accounts: Taxes, Control, and Financial Aid
A custodial account is an irrevocable gift to a minor, who takes control at an age set by state law. Kiddie tax and financial aid rules apply.
UGMA and UTMA Custodial Accounts: Taxes, Control, and Financial Aid
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What is a UGMA or UTMA account?
- It is an account held by an adult custodian for a minor under a state's Uniform Gifts or Uniform Transfers to Minors Act.
- Contributions are irrevocable gifts, and the assets legally belong to the child from the start.
- UTMA accounts can hold a wider range of property, such as real estate, than UGMA accounts.
- There are no contribution limits, but gifts above $19,000 per donor per child in 2026 require a gift tax return.
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Full Guide
What is a UGMA or UTMA account?
- It is an account held by an adult custodian for a minor under a state's Uniform Gifts or Uniform Transfers to Minors Act.
- Contributions are irrevocable gifts, and the assets legally belong to the child from the start.
- UTMA accounts can hold a wider range of property, such as real estate, than UGMA accounts.
- There are no contribution limits, but gifts above $19,000 per donor per child in 2026 require a gift tax return.
When does the child take control?
- The custodianship ends at an age set by state law, and the custodian must then transfer the assets to the young adult.
- In California the default age is 18, but the transfer can specify a later age in some cases, up to 25 for transfers under a will or trust.
- Once in control, the young adult can use the money for any purpose.
- The custodian must use the assets for the child's benefit and can't take them back.
How is a custodial account taxed?
- Income is taxed to the child, but in 2026 unearned income above $2,700 is generally taxed at the parents' rate under the kiddie tax.
- In 2026 the first $1,350 of unearned income is generally tax-free, and the next $1,350 is taxed at the child's rate.
- It generally applies to children under 18, and to 18-year-olds and full-time students under 24 whose earned income doesn't exceed half their support.
- If the donor also serves as custodian and dies before the account ends, the balance can be included in the donor's estate.
How does a custodial account affect financial aid?
- The FAFSA treats a custodial account as the student's asset, assessed at 20% versus up to 5.64% for parent assets.
- A 529 owned by a parent or dependent student is reported as a parent asset.
- Grandparent-owned 529 accounts are not reported on the FAFSA.
- Moving custodial money into a custodial 529 requires selling investments, which can realize gains, and the money stays the child's.
How does a custodial account compare with a 529?
- Custodial money can pay for anything that benefits the child, while 529 earnings are tax-free only for qualified education costs.
- A 529 owner keeps control and can change the beneficiary; custodial gifts can't be redirected.
- Custodial account income is taxable each year, while 529 growth is tax-deferred.
- Gifting appreciated shares to a child shifts the gain, but the kiddie tax often limits the benefit while the child is young.
When are custodial accounts used?
- For gifts meant for non-education goals, such as a first home or starting a business.
- To hold assets left to a minor when no trust is in place.
- To teach a child about investing while an adult still manages the account.
- When amounts are large or conditions matter, a trust can set terms a custodial account can't.
Key takeaways
- A custodial account is an irrevocable gift that the child controls at the age set by state law.
- The kiddie tax limits income shifting while the child is young.
- Custodial assets count heavily against financial aid compared with parent-owned 529s.
- Confirm gift, estate, and tax effects with a CPA or estate attorney before large transfers.
Related Topics
Tax Planning
Kiddie Tax Rules for 2026: Thresholds, Ages, and Custodial Accounts
In 2026 a child's unearned income above $2,700 is generally taxed at the parent's rate, up to age 18, or through 23 for full-time students.
Retirement PlanningHow 529 Education Savings Plans Work
A 529 plan is a state-sponsored account where money for education grows federally tax-free and comes out tax-free when spent on qualified school costs.
Retirement PlanningCustodial Roth IRA: Retirement Savings for Minors
A custodial Roth IRA is a Roth IRA for a minor with earned income, run by an adult until the child takes control; 2026 contributions cap at $7,500.