What are the Pros/Cons of a UGMA Account?

A Uniform Gifts to Minors Act (UGMA) account is a common financial tool for transferring assets to minors without establishing a formal trust. Available across all states under various statutes or through the Uniform Transfers to Minors Act, UGMA accounts provide certain tax advantages and are often utilized for saving for future expenses like college. However, they come with limitations and drawbacks that must be carefully considered.

Advantages of UGMA Accounts

UGMA accounts are known for potential tax benefits. Contributions are considered gifts and are removed from the donor’s estate, potentially reducing estate and inheritance taxes. Although gifts exceeding $16,000 per year per donor per recipient in 2023 require a gift tax return, they might still be tax-free up to the lifetime gift tax exclusion amount.

The investment income generated by assets in a UGMA account typically is taxed at the child’s lower tax rate, making it a tax-efficient way to accumulate investment returns until the child reaches the age of majority.

Setting up UGMA accounts is relatively straightforward without the legal and administrative complexities of trusts, offering a simple way for minors to own investments. The funds can be used for a range of expenses that benefit the minor, such as education costs, health care, and welfare-related expenses.

Disadvantages of UGMA Accounts

Once a contribution is made to a UGMA account, it becomes irrevocable, meaning the donor cannot reclaim the funds. This permanence requires careful consideration, especially if the donor’s financial circumstances change.

Upon reaching the age of majority, which is typically 18 or 21 depending on state laws, the beneficiary gains control over the assets. At this point, they can use the funds for any purpose, potentially deviating from the original intent of the gift.

Assets in UGMA accounts are considered the child’s when applying for college financial aid. This classification can significantly reduce financial aid eligibility because a higher percentage of a child’s assets are expected to contribute to college expenses compared to those of the parents.

If the custodian, often a parent, passes away before the assets are transferred, those assets in the UGMA account could be considered part of the custodian’s estate, potentially subjecting them to estate taxes.


UGMA accounts provide both benefits and challenges. They can be an effective means of gifting assets to minors, offering tax advantages and ease of management. However, the irrevocable nature of the gifts, potential impact on financial aid, and loss of control when minors reach the age of majority are significant factors to consider.

Given the complexities and specifics of tax implications over the years, consulting with an independent fee-only financial adviser is advisable. Such professionals can offer tailored advice that considers your financial goals, tax situation, and the needs of the minor beneficiary, ensuring that setting up a UGMA account aligns with your overall financial planning strategy.

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