UTMA vs. Trust: Choosing an Account for a Minor’s Funds

A UTMA account is a custodial account created by state law to transfer assets to a minor, while a trust account is a legal arrangement established by a grantor to benefit one or more beneficiaries. UTMA accounts are managed by a custodian, typically a parent or guardian, until the minor reaches the age of majority, whereas a trustee is responsible for managing and administering a trust account according to the terms of the trust.

Once a minor reaches the age of majority, they become an adult. Defined by the state, they gain full ownership and decision-making authority over a UTMA account. Trust accounts have distribution provisions outlined in the trust document, which may not align with the age of the majority.

Trust accounts offer better customization options, allowing for specific conditions, purposes and asset distribution plans, whereas UTMA accounts have limited flexibility as state UTMA laws govern them.

Taxation differs between the two types of accounts. UTMA accounts can be subject to the "kiddie tax." This is where investment income is taxed at the parent's rate until a specific age threshold. Trust account tax treatment varies based on the trust type, income tax rules and potential estate tax implications.