Direct Answer
A custodial brokerage account (UGMA/UTMA) is opened by an adult for a minor as an irrevocable gift. The adult custodian manages the account until the minor reaches the state's majority age (18-25 depending on state). No contribution limits; gift tax annual exclusion is $19,000/donor (2026). Earnings subject to kiddie tax (parent's rate above $2,700 net unearned income). FAFSA treats as student asset at 20% -- higher than parent-owned 529 plans. Funds can be used for any purpose.
Custodial Brokerage Account Profile: UGMA/UTMA for Minors
What is a Custodial Brokerage Account?
A custodial brokerage account is a taxable investment account established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) by an adult on behalf of a minor beneficiary. The custodian manages the account and makes investment decisions until the minor reaches the age of majority set by state law (18 to 25 depending on state).
Key features:
- Irrevocable gift: Once assets are transferred, they legally belong to the minor and cannot be reclaimed by the donor or custodian.
- Unrestricted use: Unlike 529 plans, funds can be used for any purpose once the minor reaches majority.
- No contribution limits: Any amount can be contributed; gifts above $19,000/donor (2026) require Form 709 filing.
- SIPC coverage: $500,000 per account ($250,000 cash sublimit).
- Can hold: Stocks, ETFs, bonds, mutual funds; UTMA also permits real estate and other property types.
Custodial Account vs. 529 Plan
| Feature | Custodial Brokerage (UGMA/UTMA) | 529 Plan |
|---|---|---|
| Contribution limits | No limit (gift tax exclusion $19,000/donor) | No federal limit; gift tax exclusion applies |
| Tax on earnings | Taxable to minor; kiddie tax applies | Tax-free if used for qualified education expenses |
| Restrictions on use | None (any purpose at majority) | Qualified education expenses only (penalties otherwise) |
| FAFSA assessment | 20% (student asset) | Up to 5.64% (parent asset if parent-owned) |
| Ownership | Minor owns irrevocably | Account owner retains control; can change beneficiary |
Frequently Asked Questions
- What is a custodial brokerage account?
- A custodial brokerage account (UGMA/UTMA) is opened by an adult for a minor as an irrevocable gift. The custodian manages the account until the minor reaches the state's majority age (18-25 depending on state). No contribution limits; gift tax annual exclusion is $19,000/donor (2026). Can hold stocks, ETFs, bonds, and mutual funds. Funds can be used for any purpose at majority. SIPC coverage $500,000 per account.
- How are custodial brokerage account earnings taxed?
- Earnings are taxed to the minor. The kiddie tax (IRC Section 1(g)) taxes net unearned income above $2,700 at the parent's marginal ordinary income rate until age 19 (or 24 for full-time students). First $1,350 tax-free; next $1,350 at the minor's rate; above $2,700 at parent's ordinary income rate (but capital gains rates still apply to capital gains and qualified dividends). Source: IRS Tax Topic 553; IRC Section 1(g).
- How does a custodial brokerage account affect financial aid (FAFSA)?
- Custodial accounts transferred to the student are assessed at 20% of value in the FAFSA Expected Family Contribution formula. This is significantly higher than the maximum 5.64% for parent-owned assets, including parent-owned 529 plans. $100,000 in a student custodial account reduces potential aid by up to $20,000 versus $5,640 for a parent-owned 529. Parents saving for college often prefer 529 plans for this reason, despite the use restrictions. Source: Federal Student Aid, How Aid Is Calculated.