Your children may still be in diapers, but they don’t need suits to become investors today. You can start investing in your children’s future and begin building a legacy by turning to the Uniform Gifts to Minors Act (UGMA).
The UGMA allows you to open a custodial brokerage account that holds assets such as stocks, bonds, and cash for the benefit of a minor. The minor is technically the legal owner of the account. But as a custodian, you manage the account and the assets it holds. Once the child reaches the age of majority, he or she is allowed to manage the account.
But there are some risks involved. And there are some key points to be aware of before you decide whether a UGMA account is right for you. So let’s take a deeper look.
How Does a UGMA Work?
You can open a UGMA account through most brokerage firms and banks. You can use this account to invest in a variety of assets, including stocks, bonds, cash, mutual funds, exchange-traded funds (ETFs), insurance policies, and annuities.As a custodian, you have a fiduciary duty to manage the account for the sole benefit of the minor. This means funds can be used to cover the child’s education as well as basic living expenses. When the child reaches the age of majority, he or she can manage the account and its assets.
What About the Gift Tax?
The assets in a UGMA account are considered irrevocable gifts to minors. This means you can’t take these assets back once transferred to the account. But it also means contributions are subject to gift tax.In 2025, you can give up to $19,000 per individual without having to file a federal gift tax return. But even if you exceed that limit, it doesn’t necessarily mean you’d owe gift taxes. However, you’d need to file IRS Form 709 to report it. The amounts exceeding the gift tax exclusion would be subtracted from your lifetime gift and estate tax exclusion. For 2025, it’s $13.99 million. Once you exceed that larger limit, you may need to pay gift taxes.
Broader Tax Implications
UGMA accounts are subject to what’s known as the “kiddie tax.” They are taxed based on the earnings in the account and the child’s age.Here’s how it breaks down for 2025:
- The first $1,350 in unearned income including UGMA earnings is tax-free.
- The next $1,350 is taxed at the child’s tax rate.
- Any earnings above $2,700 are taxed at the parent’s rate.
Benefits of UGMA Accounts
A UGMA account is a great way to begin investing in your child’s future. It could also serve as a way to help your child understand the value of money. It can help children become disciplined investors and set them on the right path to financial wellness. Here are some more benefits of a UGMA account:- Easy to set up
- Less complex than a trust
- No contribution limits
- Access to a variety of assets
Disadvantages of UGMA Accounts
While a UGMA account offers a variety of benefits, it does come with some risk. One of the biggest concerns is that a UGMA account may affect a child’s eligibility for college financial aid. This is because the account is considered an asset of the minor. So if the account is substantially large, it may reduce the child’s financial aid package or eliminate it entirely.
Students must report their UGMA accounts on the Free Application for Federal Student Aid (FAFSA). And a UGMA would reduce eligibility for need-based aid by 20 percent of the net worth of the asset. In other words, the student would be expected to contribute 20 percent of these assets toward funding his or her education.
UGMA Versus UTMA
You may have also heard of the Uniform Transfers to Minors Act (UTMA). This is another type of custodial account that works similarly to a UGMA. However, your investment options are broader. A UTMA also allows you to transfer physical assets such as fine art and real estate to a minor.The Bottom Line
UGMA accounts allow you to begin investing in a minor’s financial future as early as possible. A UGMA lets you transfer assets such as stocks, bonds, and ETFs to a minor. While the minor is the legal owner of the account, you remain custodian or manager of the account until the child reaches the age of majority. This is usually age 18 or 21, depending on the state.UGMAs have no contribution or withdrawal limits. And, in some cases, they are taxed at the child’s presumably lower tax rate. They can be a great way to help your child learn about the benefits of saving and investing at a very young age. This can help the child become a more experienced and disciplined investor on the path to building wealth. But keep in mind, these accounts could have an impact on your child’s financial aid eligibility.
If saving for college is your main goal, you may want to consider a 529 college savings plan. You could also seek the guidance of a qualified financial adviser to help you choose which account is best for the benefit of your child.
The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
