Custodial Accounts (UTMA)

Pricing & Fees

For pricing and fee information, please contact PNC Investments or see the PNC Investments Products and Services Overview.

Gift Tax Exclusion

Contributions to custodial accounts under UTMA qualify for the annual federal gift tax exclusion, up to $18,000 for 2023.

Beneficiary Guidelines

Though there are a few exceptions, in most cases the beneficiary has no right to the assets in the account until he or she reaches age 18 (or 21, in some states).

A custodial account is a financial account that’s managed by one person (the custodian) on the behalf of another. Typically, custodial accounts are investing or savings accounts managed by a family member, such as a parent or grandparent, for the benefit of a minor (someone under the age of 18 or 21 years old, depending on state law). However, custodial accounts can be opened by any adult on the behalf of any minor — no law limits custodial accounts to relatives.

Custodial accounts function like other investing or savings accounts offered by a bank or brokerage. However, with a custodial account, the custodian controls how money is invested and spent. Once the minor reaches the age of majority, control over the account is transferred to them.

Custodial accounts offer a simple way for an adult to make financial gifts to their young loved one. They’re a popular way to help save for a child or grandchild’s higher education expenses, but funds may be withdrawn for any purpose as long as it’s for the minor’s benefit.

There are two main types of custodial accounts: those made possible by the U.S. Uniform Transfers to Minors Act (UTMA) and those under the Uniform Gift to Minors Act (UGMA). Of the two, UTMA offers more flexibility and is the kind offered by PNC.

Custodial accounts offer several benefits to both the custodian and the minor recipient. For one thing, unlike some types of investing accounts (such as individual retirement accounts, or IRAs), there are no limits on contributions and no required regular distributions. There are also no penalties for making withdrawals.

Custodial accounts also offer tax advantages. Because the Internal Revenue Service (IRS) considers the minor to be the owner of a custodial account, most earnings in the account are taxed at the child’s tax rate. Under U.S. law, children under the age of 19 — or 24 for full-time students — who are included on their parent’s tax return are allowed to report a certain level of unearned income either tax-free or at a reduced tax rate.^[1]

In addition, because deposits into custodial accounts are considered gifts, parents and grandparents can use custodial accounts to give their young loved ones up to $18,000 per year (or $36,000 from a married couple) tax-free without using their lifetime gift tax exemption.^[2]

Money can be added to a custodial account just as it would to any other savings or investing account.

For example, contributors can initiate a bank transfer to directly move funds from their checking or savings account into the custodial account. They can also set up direct deposits online to regularly add money to the account on a predetermined schedule. Accounts can also be funded by a check deposit. If writing a check to be used in a custodial account, include the child’s name as the payee of the paper check.

Anyone can contribute to a custodial account. Contributors don’t need to be the custodians of the account. However, to make a bank transfer or direct deposit, they will need to provide the account’s routing and account numbers.

UTMA is an acronym representing the Uniform Transfers to Minors Act. This is a U.S. federal law that allows minors to receive gifts directly from a donor without having to use an intermediary such as a trustee.

Gifts may be made in the form of cash, securities, real estate, fine art, patents, and even royaltiesfind out more about acceptable gifts.

Under UTMA, an appointed custodian is in charge of managing the minor’s account until they reach the age of majority (18 or 21, depending on your state’s laws). Once the account’s beneficiary comes of age, the control of the account is transferred to them.

UTMA may also provide tax advantages for recipients.

However, not all states and U.S. territories are required to adopt UTMA for its residents. Currently, South Carolina and Guam have not adopted the law.^[3]

States can also set the age at which custodial accounts are transferred to their beneficiaries. While many states recognize 21 as the age of UTMA majority, some may allow account control to be transferred at age 18.

Technically, a custodial account is a type of trust that can be defined as an account in which one party manages assets on behalf of someone else.

However, when thinking about trusts, many typically think of a legal agreement drawn up with the aid of a lawyer as part of the estate planning process — although a living trust can be set up during the life of the grantor (the person who creates and funds a trust).

With many trusts, the grantor appoints another adult — the trustee — to manage the account on behalf of the beneficiary after the grantor may no longer be able to act or passes away.

Trusts may be expensive and difficult to set up correctly. In addition, the grantor can set up trusts for specific purposes and with specific conditions.

By comparison, UTMA custodial accounts are easy and low-cost to create. You don’t need a lawyer to open a custodial account — at PNC, they can easily be created online.

In addition, funds may be withdrawn from custodial accounts for nearly any purpose as long as it benefits the minor. That makes this a more flexible choice than trust funds. In addition, thanks to UTMA, there are tax benefits to making a gift in a custodial account that aren’t available with trusts.

A custodial account is controlled by the adult who creates and manages the account, also known as the custodian.

Typically, custodians are the minor’s parents or grandparents. However, any adult friend or family member can create and control a custodial account on the behalf of any minor until they reach 18 or 21, depending on state law.

Anyone can contribute to a custodial account. Contributions are not limited to the account’s manager or custodian.

However, anyone wishing to contribute to a custodial account via bank or wire transfer must know the routing and account numbers for that particular account.

Custodial accounts take advantage of what the IRS refers to as the “kiddie tax.”^[4] The IRS considers custodial accounts to be the property of the minor listed as the beneficiary. This means that earnings made in the account from interest or investment gains are taxed at the child’s tax rate up to a certain threshold.

For tax year 2024, the first $1,300 of a minor’s unearned income (such as that accrued in a custodial account) may not be taxed. The following $1,300 is subject to the kiddie tax rate. Any amount over this level is taxed at the parent’s tax rate.

In addition, in tax year 2024, the IRS allows tax-free UTMA contributions of up to $18,000 without using their lifetime exemption for the federal gift tax.^[5]

Once the minor reaches the age of majority in their state, they are required to file a tax return. All earnings will then be subject to their current tax bracket.

Custodial accounts allow the custodian to make unlimited withdrawals from the account. However, these withdrawals must be used for the benefit of the minor child beneficiary. That means funds can be used to pay for the child’s education. In fact, custodial accounts are a popular alternative to 529 plans for saving for college.

However, custodial account funds needn’t be limited to paying for school. Funds from the account can be used to pay for the child’s clothing, a first vehicle, medical expenses, or even taxes on the income generated by the custodial account itself.

Of course, once the beneficiary becomes of age (as defined by the laws in the state in which they reside), control of the account transfers to them, and the custodian can no longer make withdrawals from the account.

Custodial accounts are transferred to the beneficiary when they reach the age of majority as defined by the state or U.S. territory in which they reside. Depending on state law, this may be 18 or 21.

Note that UTMA custodial accounts are currently not allowed in South Carolina and Guam.