The Parent’s Guide to UGMA vs. Trust Funds

Wrapping a gift can send a flutter of excitement through you—there’s nothing quite like the look on your child’s face when they open a gift they’ve hoped for. Planning a financial gift can make you envision lots of important moments in your child’s future, from crossing the graduation stage to turning a key in their new home’s front door. Both a Uniform Gifts to Minors Act (UGMA) account and a trust fund can help you plan a financial gift to bring your dreams for your child to life. The choice you make will affect taxes and how your child can access and use the account. Generally, a UGMA or UTMA is cheaper and simpler, while a trust fund can offer more customizable options.

UGMA and UTMA Basics

Every state has adopted laws based on the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). These accounts are custodial, meaning they hold money, financial securities, and sometimes other assets on a minor’s behalf. When the minor reaches a certain age (typically at 18 or 21, depending on the state) they take full control of the account.

Contributions to a UGMA/UTMA are irrevocable, meaning any gift becomes the child’s property. The custodian (e.g., a parent or other adult) has an obligation to manage the account in the best interests of the child. Once the child takes over the account, they have full freedom to use the account however they wish. This flexibility can be a perk (no restrictions, unlike some college savings plans) or a potential liability if you’re worried about your 18-year-old’s sense of financial responsibility.

You can open an account through many financial institutions, such as banks or investment management companies. (You can also open a UGMA account through Fabric by Gerber Life.) Account options and fees can vary depending on the company you choose, but you may be able to find UGMA or UTMA options with no minimum investment and no (or low) account fees. This can make it easy to get started, even if you’re contributing a little at a time.

UGMA and UTMA accounts offer some tax advantages for growth. For minors with no earned income, the first $1,350 in account earnings is exempt from federal tax. The next $1,350 is taxed at the child’s rate, and any earnings above that are taxed at the parent’s (typically higher) tax rate.

Trust Fund Basics

A trust is a form of legal agreement that sets aside money or property for someone else. There are generally three roles in a trust: the grantor, the beneficiary and the trustee. The grantor is the person who sets up the trust (e.g., a parent or other adult), the beneficiary is the person the trust assets are for (e.g., your child) and the trustee is the person or entity managing the trust.

You can choose a trusted individual in your life to be the trustee, or work with professional trustees (e.g., an attorney, a trust company). While you could technically serve as both the grantor and the trustee, this could affect some tax exclusions, which may be a key reason for establishing the trust.

You can choose either a revocable trust (which you can undo if your plans change) or irrevocable (which you can’t change, but may reduce estate tax obligations).

Trusts are generally more complex than UGMA and UTMA accounts. On the positive side, you have many more options to set up the account on your terms. You can specify when the beneficiary gains access to the money—whether by age or milestone (e.g., after earning a degree). You can give the beneficiary access to the full account or set up scheduled distributions, and even add other conditions. Some trusts, such as a special needs trust, are designed to meet specific needs such as leaving money without affecting government aid eligibility.

The downside is that trusts (and their taxes) can be more complicated and expensive than opening a UGMA. Most people work with an attorney to ensure their trust meets all the legal requirements, with legal fees ranging from $1,500 - $3,000. Management fees may also be higher than some UGMA/UTMA options. Because of the higher upfront cost, it can feel less worthwhile to open a trust if you don’t have a substantial contribution. Some companies may require a minimum contribution to open a trust.

Choosing Between a UGMA Account and Trust Fund

Both a UGMA account and a trust fund can help you put money aside for your child’s financial future. The right choice depends on what advantages you’re looking for and how you’d prefer for your child to access the funds.

More control over account management: UGMA/UTMA

With a trust fund, a trustee may handle account management, rather than you. This can be a relief (one less thing to do!) or a drawback, depending on your preferences. If you set up a UGMA or UTMA, you’re the one managing the account.

More control over how your beneficiary gets the funds: Trust

If you’re focused on control over how your child receives their money, a trust can give you more room to choose the age, set conditions or schedule distributions. UGMA and UTMA accounts transfer control to the beneficiary when they reach the age of majority.

Specialized situations: Trust

You can find various minor distinctions between UGMA and UTMA account options, in terms of fees or how you select investments, but these custodial accounts generally aim to keep it fairly straightforward.

If you want a specialized agreement to fit certain estate planning goals, a trust may provide more options. Revocable, irrevocable, special needs, charitable, generation skipping and other trust types may offer the exact specifications and benefits for complex plans.

Cost and convenience: UGMA/UTMA

Trust funds can be legally complex. The benefit of that complexity is the opportunity to get specific about the conditions you set. You may have a lot of room to customize a trust to your family’s particular interests. The cost is, well, cost—you may need to devote more time and money to create a trust with the help of an attorney to reflect your exact wishes and uphold any legal requirements.

Typical trust fees may include:

• Enrollment or trust opening fee: Depending on trust complexity, this may range from a

  few hundred to a few thousand dollars.

• Annual or monthly fee: Either a flat fee or percentage based on the value of assets in

  the trust.

• Investment management fees: Fees to manage investments may fall in the range of 1-

  2% of the value of assets in the trust.

If creating a trust is like preparing a home-cooked feast from scratch, a UTMA or UGMA might be a little more like picking up pizza on the way home. It can be easy to find options where a lot of the structure is taken care of for you, so you may be able to set up your account more simply and without legal help (and the corresponding legal fees). The downside is you may be limited in terms of choosing specific investments, and you won’t be able to set the complex instructions you can with a trust.

You may be able to find options at many companies to open a UTMA or UGMA for free and pay $0 monthly or annual fees. Other UGMA or UTMA accounts may charge maintenance fees, but you may find lower fees than some trust accounts. Because of the pre-set structure and options with minimal fees, UGMA and UTMA accounts may be a cheaper and more convenient choice for some families who are satisfied with a simpler account without a trust’s customizations.

Small steps you start now can go a long way toward preparing a bright financial future for your child. Either a custodial account or a trust can be a helpful vehicle to invest money on your child’s behalf.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

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