How Does a Uniform Gifts to Minors Act (UGMA) Account Work?

What Is the Uniform Gifts to Minors Act (UGMA)?

The Uniform Gifts to Minors Act (UGMA), developed in 1956 and revised in 1966, allows individuals to give or transfer assets to underage beneficiaries; traditionally, parents and their children. The amount is free of gift tax, up to a certain amount. The assets are usually placed in UGMA accounts on behalf of minors, eliminating the need for an attorney to establish a special trust fund. UGMA funds are also subject to special tax treatment.

Key Takeaways

  • The Uniform Gifts to Minors Act (UGMA) provides a way to transfer financial assets to a minor without the time-consuming and expensive establishment of a formal trust.
  • A UGMA account is managed by an adult custodian until the minor beneficiary comes of age, at which point they assume control of the account.
  • UGMA account-generated earnings are not tax-sheltered, but they are taxed at the minor's lower "kiddie tax" rate, up to a certain amount.

Watch Now: What Is the Uniform Gifts to Minors Act?

How the Uniform Gifts to Minors Act (UGMA) Works

A UGMA account functions as a type of custodial account designed to hold and protect assets for the beneficiary. The donor can appoint themselves, another person, or a financial institution in the role of custodian.

The custodian—who has a fiduciary duty to manage the account in the beneficiary's best interest—can use the funds to buy stocks, bonds, mutual funds, and other securities on behalf of the minor. UGMAs are usually limited to these sorts of publicly-traded financial assets; they cannot invest in speculative instruments, like derivatives, or buy on margin.

UGMA accounts can be opened through a bank or brokerage institution. Friends and family can make contributions to the accounts, which carry no contribution limits or income limits. These deposits are irrevocable; they become permanent transfers to the minor and the minor's account.

Typically, UGMA assets are used to fund a child’s education, but the donor can make withdrawals for just about any expenses that benefit the minor. There are no withdrawal penalties. However, because UGMA assets are technically owned by the minor, they do count as assets if they apply for federal financial aid for college, possibly decreasing their eligibility.

Once they reach the age of majority in their state, minors are granted full access to their UGMA account. At that point, they may use the funds as they please.

Special Considerations

Contributions to UGMA accounts are made with after-tax dollars; the donor doesn't receive an income tax deduction for making them. However, up to $16,000 per individual can be contributed free of gift tax for calendar year 2022, increasing to $17,000 for calendar year 2023.

For federal tax purposes, the minor or beneficiary is considered the owner of all assets in a UGMA account and the income they generate. But these accounts' earnings can be taxed either to the child or the parent. Reporting requirements depend on the amount of income the account generates and the beneficiary’s age.

Under certain circumstances, parents can elect to report their children’s UGMA accounts on their own tax returns, thereby taking advantage of the “kiddie tax” or "Tax on a Child's Investment and Other Unearned Income."

This means that if the child’s unearned income, including UGMA earnings, was less than $2,200 in 2021 (increasing to $2,300 in 2022) and they were no older than 19 (or 24 if a full-time student) at the end of the corresponding tax year, parents can elect to report their child’s income on their own tax return.

In this case, the first $1,100 of the child’s unearned income is treated as tax-free (increasing to $1,150 in 2022). The next $1,100 is taxed at the child’s tax rate. Anything exceeding $2,200 is taxed at the parent's tax rate. If such an election is not made or if the child’s unearned income exceeded $2,200 at the end of the tax year, the minor would have to file a tax return subject to “kiddie tax” rules.

For tax purposes, a UGMA affects a donor’s lifetime gifting limits. Should a donor acting as the custodian die before the custodial property is transferred to the minor, the entire custodial property is included in the donor's taxable estate.


UGMA and the Uniform Transfers to Minors Act (UTMA) are usually used interchangeably, but the two do have some distinctions. Custodial accounts set up under the newer UTMA, which dates from 1986, can contain any kind of tangible or intangible asset, including real estate, works of art, and intellectual property. In contrast, UGMA accounts are limited to financial assets, such as cash, stocks, bonds, and insurance products (policies, annuities).

How Are Gifts to Minors Taxed?

Gifts in the amount of up to $16,000 in 2022 are exempt from taxes. This increases to $17,000 in 2023. Gifts in any amount over this amount per year will be taxed.

What Is a Downside to the Uniform Gifts to Minors Act (UGMA)?

As the assets in a UGMA account are owned by the minor, even if they are not accessible till a certain date, this can reduce the amount of financial aid that a minor might have otherwise received, or make them ineligible for aid altogether. This is one of the downsides to the UGMA.

Where Can I Open a Uniform Gifts to Minors Account?

A Uniform Gifts to Minors account can be opened at a brokerage institution or a bank. Anyone can contribute the deposit amounts. These deposit amounts are irrevocable once made.

Article Sources
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  1. Federal Student Aid. "What Is the Net Worth of Your Investments?"

  2. Social Security Administration. "Program Operations Manual System (POMS)."

  3. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2023."

  4. Internal Revenue Service. "Topic No. 553 Tax on a Child's Investment and Other Unearned Income (Kiddie Tax)."

  5. Internal Revenue Service. "RP - 2021-45," Page 8.

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