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Custodial Accounts

With a recent change in how children’s income from savings is taxed, custodial piggy-bankaccounts under UGMAs and UTMAs have seeped into talks about saving for college expenses. Here’s a look at what these accounts are and whether they can help accomplish your education savings objectives.


The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are available in most states as alternatives to establishing trusts. Just as gifts to an irrevocable trust can’t be reversed, gifts to a UGMA or UTMA account are also final. This means your minor children will immediately own whatever is transferred to these accounts, although you can take withdrawals for the benefit of a child’s education and related expenses.

A custodian, which can be a parent, financial institution or advisor, manages either account and anyone can transfer assets to these accounts. You can put virtually anything, including property, into a UTMA account, while a UGMA account accepts only cash, insurance and securities.


Custodial accounts were once used by parents to transfer assets to children, whose unearned income was taxed at a lower rate than their parents’ rate. In recent years this changed, as most custodial accounts’ unearned income was taxed at parents’ (typically higher) rates.

Now, the tax treatment of a child’s unearned income is even more extreme thanks to recent tax law changes. In 2018, children under the age of 19 or full-time students under the age of 24 pay an even higher trusts and estates tax on unearned income – up to 37% on unearned income over $12,500. In light of these changes, talk to a tax professional to learn if a custodial account or other alternative is best for your situation.

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