UTMA Drawbacks You Should Consider
While UTMAs offer unmatched flexibility, they come with a few important caveats that can influence your overall plan.
1. Kiddie Tax Rules
UTMAs are taxable accounts. The IRS uses the “kiddie tax” to prevent high earners from shifting income to lower-taxed children.
Here’s how it works in 2025:
| Unearned Income | Tax Treatment |
|---|---|
| First $1,350 | Not taxed (standard deduction) |
| Next $1,350 | Taxed at child’s rate |
| Over $2,700 | Taxed at parent’s rate |
Unearned income includes dividends, interest, and capital gains—so careful planning is required if investing for long-term growth in stocks or mutual funds.
2. Financial Aid Impact
UTMA accounts are considered student assets, which are assessed more heavily in FAFSA calculations:
| Asset Owner | Expected Contribution Toward College (FAFSA) |
|---|---|
| Student (UTMA) | Up to 20% |
| Parent | Up to 5.64%, with some assets protected |
So, compared to a 529 or parent-owned brokerage account, UTMAs can reduce eligibility for need-based aid.
3. Irrevocable Gift = Full Control at Age of Majority
Once the child becomes an adult (age varies by state), you lose control. If they decide to spend the money unwisely, there’s no legal recourse.
“That could be a benefit or a risk—depending on your child’s financial literacy.”