Grandparents can create custodial accounts to support their grandchildren.

Even though grandparents have already reared their own children to adulthood, they often desire to support their grandchildren as well.

One popular way for grandparents to support their grandchildren's needs is through the use of custodial accounts.

Accounts created under the Uniform Transfers to Minors Act (UTMA) and the Uniform Gifts to Minors Act (UGMA) allow adults to maintain oversight of assets transferred to minors until reaching the age of majority.

Although these custodial accounts have many benefits, grandparents should consider the implications of taxes, future control, and the size of the gift.

Custodial accounts, such as UTMA and UTGA accounts, can be beneficial under certain circumstances.

What are UGMA and UTMA Accounts?

UTMA and UGMA accounts are both custodial investment accounts to allow minors to own securities and other assets.

Rather than the minors managing the accounts, designated adults oversee the accounts until the children reach age 18 or 21.

Any account custodian has a fiduciary duty to take action based on the best interests and benefits of the child.

After children reach the age of majority, they can manage their own accounts and use them for any purpose they desire.

What are the differences between UGMA and UTMA accounts?

While UTMA accounts allow for a greater variety of assets, such as fine art, patents, or real estate, UGMA accounts can only hold limited financial instruments, including bonds and stocks.

Tax and Financial Aid Implications

While the benefits of UTMA and UGMA accounts include simplicity and flexibility, they are not immune to possible unintended consequences.

All contributions made to the custodial accounts are treated as completed gifts.

What does this mean?

The money is considered legally the child's property.

This means the donor will have limited control, and the assets will be at risk of being misused by the financially immature recipient in young adulthood.

Although income from the account can be taxed at the “kiddie tax” rate for children, portions of the income from the custodial account could be taxed at the marginal rate for the parents if the amount exceeds the allotted threshold.

For moderate investments, these accounts can be tax-efficient as portions of the income may be free from taxes or taxed at a lower rate.

Another potential issue with UTMA and UGMA accounts concerns how college financial aid applications treat these accounts.

The funds in these custodial accounts may count less favorably toward this application than those held by the parents.

To prevent a possible impact on financial aid eligibility, grandparents may consider 529 plans as an alternative.

When Custodial Accounts Make Sense

These UTMA and UGMA custodial accounts are best for smaller gifts.

Grandparents can use these to fund their grandchildren's first cars, education, or travel.

They are also reasonably simple to set up.

When larger gifts and the need for long-term control are essential, trusts and 529 plans may be better choices.

These tools enable the limitation of distributions, setting rules, and mitigating the impact on financial aid.

If you are wondering how to strategically provide for your grandchildren through estate planning, you can request a consultation with our law firm in Overland Park, Kansas.

What are Key Takeaways for Custodial Accounts?

While UGMA and UTMA accounts allow gifting to minors, the minors will gain complete control when reaching the age of majority.

Because the children are considered the owners of the accounts, these custodial accounts can complicate tax and financial aid issues.

Larger gifts are typically more beneficial under a trust structure than through UGMA or UTMA accounts.

In addition to providing financially for your grandchildren, you can share your values and help them learn wise financial management.

This post is for informational purposes only and does not provide legal advice. You should consult an attorney for advice on any specific issue or problem. Nothing herein creates an attorney-client relationship between Harvest Law KC and the reader.

Reference: Fidelity Investments (Jan. 16, 2025) “Must-know facts about UGMA/UTMA custodial accounts”