Investing UTMAs vs. Trust Funds Is It Better to Gift Assets to a Child Through a UTMA or Trust Fund? By Joshua Kennon Joshua Kennon Twitter Website Joshua Kennon is an expert on investing, assets and markets, and retirement planning. He is the managing director and co-founder of Kennon-Green & Co., an asset management firm. learn about our editorial policies Updated on June 18, 2021 Reviewed by Michael J Boyle Reviewed by Michael J Boyle Michael Boyle is an experienced financial professional with more than 10 years working with financial planning, derivatives, equities, fixed income, project management, and analytics. learn about our financial review board In This Article View All In This Article UTMA Basics UTMA Advantages UTMA Disadvantages: Financial Aid Trust Fund Basics Advantages of Trust Funds Drawbacks of Trust Funds Photo: Christopher Hopefitch / Getty Images One of the biggest choices parents, guardians, or other family members may face when they want to gift a large sum of money to a minor child is how to do it. The method you choose when giving assets to a minor child can have a great impact on how those assets are taxed. Two of the main ways you can gift assets to a minor child are the Uniform Transfers to Minors Act (UTMA) or placing them in a trust fund. While both options have good aspects that can make them ideal for certain cases, there are some drawbacks to be aware of. UTMA Basics UTMAs are custodial accounts subject to rules for how they can be opened and used. A custodial account is one in which money or other assets are placed in the name of a child. A UTMA serves as a way for a minor child to own property. The child is the owner of the assets when they're given under a UTMA. The gift is irrevocable. This means it can't be undone, and the money can't be taken back by the giver for any reason. The child has no right to access or manage the funds until they reach the age of majority, however, as spelled out in the UTMA documents. The assets are held in the name of a custodian for the child until they reach that age. Note Unless the UTMA documents say otherwise, the age a child must be to receive the assets from the account is usually 18 or 21. UTMAs can be used for nearly any type of asset, including real estate, intellectual property, precious metals, and ownership in family limited partnerships. The most common assets found in UTMAs include stocks, bonds, mutual funds, and index funds. UTMAs offer some of the best features of trust funds but without many of the costs and rules. They are popular because of the low costs and easy upkeep they offer. Setting up a UTMA The simplest way to set up a UTMA is to open a custodial account at a brokerage company. You may choose to use a full-service broker or a discount broker. A UTMA Example Here's how a UTMA works. Thomas, who lives in Missouri, establishes a UTMA for his daughter, Jane. He wants to name himself as custodian and restrict the assets to the latest possible date under the Missouri UTMA statute, which is 21 years old. Thomas sets up a UTMA custodial account, naming the account and the assets as "Thomas Smith Custodian for Jane Smith Under the Missouri Uniform Transfers to Minors Act Until the Age of 21." He has total control over the account until Jane turns 21 years old. He makes the buying and selling choices for the investments in the account. He can also opt to have an asset management company watch over the account and make decisions on it. Jane will eventually have total and complete control over how those assets are used once she reaches the age at which the UTMA ends. Nothing can stop her from taking the cash to Las Vegas and spending it all in a weekend, even if Thomas put money into the UTMA with the hope she would use it to go to dental school. UTMA Advantages Remember, these UTMA assets belong to the child, not to the custodian. Unlike a college 529 savings plan or a bank account with the parent listed as a joint account owner, the assets aren't considered part of an estate if the parent or other custodian files for bankruptcy. Note Money in a UTMA is out of the reach of the custodian's creditors, should financial trouble befall the custodian. UTMA Drawbacks The value of the assets in a UTMA will count against the child, who is the owner of the account, when federal financial aid eligibility for college is determined. Financial aid is based on the assets of the student. The fewer assets a student has, the more financial aid they might receive to pay for school. Money in a UTMA could reduce the amount of a student's aid reward. This rule wouldn't affect an adult custodian who wanted to go back to school, according to FAFSA. Custodial Duties and Responsibilities The custodian has the duty by law to act as a fiduciary for the child, which means that they must always put the interest of the minor above their own with regard to the UTMA's assets, even if they were the one who gave the assets that became part of the UTMA. The minor has certain rights. When they reach the age at which the UTMA ends, they can petition a court to "compel an accounting" from the fiduciary to ensure that the handling of the assets was done right. From the example, if Jane were to ask for an accounting from her father, he would have to produce documents and receipts showing where every penny of the UTMA money went. He would need to divulge how much was given, how much was spent, and how much was invested, and produce the dates of those transactions to show how well the investments did. Note At least one court has found that costs Thomas would have to cover as part of being a parent, such as medical costs, must come from him in particular and not from the money he gifted via the UTMA. Using UTMA money against the rules is considered embezzlement. Courts have ordered UTMA custodians to reimburse children for all of the stolen or misused funds plus interest and missed investment income. Trust Fund Basics A trust is a legal agreement to hold assets to be set aside for the benefit of a person who doesn't control them. "Inter vivos," or living trusts, are set up during the life of the "grantor." The grantor is the person who creates and funds the trust. The grantor sets aside assets, which can include cash, real estate, securities, or other items of value, to benefit another person or group of people, who are called "beneficiaries." The grantor can direct that the assets be managed in a certain way with a specific set of terms. Setting Up a Trust Fund Trust funds are made when the grantor's lawyer draws up a legal document known as the "trust instrument." This item spells out the rules of the trust. Rules might include guidance on how the money is to be invested, and how and when the funds can be given to the beneficiary. The trust instrument also names a trustee, who is a person or institution who will manage the assets on behalf of the beneficiary. The trustee must also act in a fiduciary role. Note A trust may also name a trust protector, who is often a close family friend, who has the ability to remove the trustee or perform certain other tasks to serve as a check on the trustee's power. Revocable vs. Irrevocable Trusts Most, but not all of the time, the grantor will act as trustee during their lifetime. They will name a successor trustee to take over when they die or can no longer perform trustee duties. A trust that allows this kind of setup is called a "revocable trust." It's good because if the grantor dies, the next person can take control. The trust will not be part of any probate proceedings. The grantor can't change or undo the trust if it's irrevocable. The trust is given a tax identification number. Federal and state tax returns are filed on behalf of the trust, which pays taxes on certain earnings. An irrevocable trust is an entity separate and apart from the grantor. It avoids probate, and it avoids estate taxes on the value of its assets, as well, because the trust owns them, not the grantor. Note Trust fund tax rates are compressed, so trusts hit higher tax brackets much more quickly than with individual or corporate tax filings. Advantages of Trust Funds One major benefit of using a trust fund is that it's flexible enough to meet most people's needs. You can tailor its terms to almost any situation as long as it doesn't go against the law. Note If you start a trust fund for someone, you can't make a rule that the beneficiary can only get payouts if they remain a member of a certain religion, marry someone of the same race, or not marry someone of the same sex. You can create an "incentive trust" that makes payouts based upon the beneficiary reaching certain life milestones. For instance, you could say that they must graduate from a four-year college in no more than five years with a certain grade-point average. Or you might match the money they put into retirement accounts on a dollar-for-dollar basis, providing them with spending money to enjoy. Drawbacks of Trust Funds Trust funds have one big downside: their cost. They require time and effort, and there's some liability exposure for the trustee. Professional trustees are often paid for their efforts. You could use the services of an asset management firm if you have a fairly simple trust fund. For example, you leave behind $500,000 for a niece or nephew with 3% payouts to begin on their 21st birthday. You'd lose much of the ability to buy individual securities, but your total costs, except for taxes, might run about 1.5% per year of principal. Those fees could be a lot higher if you had a much more complicated trust. UTMA vs. Trust Fund—Which Is Better? Determining whether a UTMA or a trust fund is better in any given situation depends upon a number of factors: The amount of money you want to set aside for the child: Most of the time, but not always, you'll use a UTMA if the amount of the gift is smaller.The restrictions you want to place on the money: A UTMA will not be ideal if you want to insist the funds be used for a specific purpose.The need for asset protection: A good lawyer can often use trust funds in smart ways to protect beneficiaries beyond what might be possible with a UTMA. This is an area you should discuss with qualified advisors, such as an estate lawyer, a CPA who knows about trust taxes, and—depending upon the assets—an investment advisor, especially if you're dealing with large amounts of money. Key Takeaways UTMAs involve lower costs and are better for simple arrangements, while trust funds are better for more complex plans, but they cost more to set up and manage.If you want the money to be used for a specific purpose, a trust fund is a better way to go.Trust funds remain out of probate court if a backup trustee is named.UTMAs are safe from the creditors and bankruptcy proceedings of the grantor. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Social Security Administration. "Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA)." United States Office of Government Ethics. "UGMA or UTMA Account." Federal Student Aid. "Completing the FAFSA." IRS. "Retirement Plan Fiduciary Responsibilities." American Bar Association. "Revocable Trusts." ABA Law Info. "A Primer on Irrevocable Trusts."