UTMA Accounts: What You Can and Cannot Use Them For

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Using UTMA Funds: What Is Allowed and What Is Not

(Example scenario: A high school student named Lily has a UTMA account, and her custodian is Tom.)

To explain UTMA rules clearly, imagine a family where Tom is the custodian of a UTMA account created for his daughter Lily, a high school student. Even though Tom manages the account, all the money inside the UTMA legally belongs to Lily. Tom can only use the funds if the spending provides a direct, immediate benefit to Lily.

Allowed Uses of UTMA Funds

1. Education-Related Expenses

Funds may be spent on anything that supports Lily’s learning or academic development, such as:

  • School tuition

  • Textbooks and school supplies

  • Tutoring or academic coaching

  • Exam fees (AP, SAT, ACT)

  • Educational camps and enrichment programs

  • A personal laptop or tablet used for schoolwork

2. Child’s Living and Welfare Needs

Spending is allowed if the purchase directly benefits Lily, including:

  • Clothing and shoes

  • Sports equipment and training

  • Music lessons and instruments

  • A desk, chair, or study setup specifically for her use

3. Medical and Health Expenses

If Lily needs medical care, UTMA funds can be used for:

  • Doctor and dental visits

  • Orthodontics

  • Glasses or contacts

  • Mental health services

4. Hobbies and Skill Development

UTMA funds can support Lily’s personal growth and activities:

  • Art, music, or coding classes

  • Competition fees

  • Extracurricular programs

5. Investments in the Child’s Name

Tom, as custodian, can choose to invest the UTMA money in:

  • Stocks

  • ETFs

  • Mutual funds
    These investments must remain owned by Lily, not Tom.

Prohibited Uses of UTMA Funds

1. Parent or Custodian Expenses

Tom cannot use UTMA money for:

  • His own rent, bills, or transportation

  • His own meals

  • His own travel costs

2. Parent-Owned Investments or Business Expenses

Tom may not:

  • Invest UTMA money into his own accounts

  • Use the funds for his business

  • Cover his personal investment losses

3. Household or Shared Purchases

Items that benefit the whole family, not just Lily, are not allowed:

  • Shared electronics (television, family iPad, gaming console)

  • Furniture used by multiple people

  • Family vacations (only Lily’s personal portion could be allowed)

4. Anything Without a Direct Benefit to the Child

Spending is not allowed if the benefit to Lily is unclear, shared, or indirect.

Important Rules Tom Must Follow as Custodian

1. The Money Belongs Entirely to Lily

All UTMA assets are an irrevocable gift to Lily. Tom cannot take them back.

2. Custodian Must Document All Spending

Tom should keep receipts and notes showing how each purchase directly benefits Lily.

3. Control Transfers When Lily Reaches Majority Age

Depending on the state, Lily gains full ownership at age 18 or 21.
(Example: Texas and Massachusetts use age 21.)

4. UTMA Accounts Affect Financial Aid

Since the money is Lily’s asset, FAFSA may count up to 20 percent of its value, potentially reducing aid.

FAQs

  • Generally no. A UTMA is an irrevocable gift to a minor, and moving its assets into a trust changes the ownership structure, which is not permitted unless approved by a court through a UTMA-specific trust arrangement.

  • Yes, but only into a UTMA/529 plan, not a regular 529. The funds must remain legally the minor’s and cannot be retitled or treated as parent-owned assets.

  • Some state UTMA statutes allow reasonable custodian fees, but many custodians choose not to charge fees. Laws vary by state.

  • Possibly. If a UTMA account generates enough unearned income, the minor may need to file a tax return, and Kiddie Tax rules may apply.

  • At the age of termination (often 18 or 21), the account must be transferred fully into the individual’s name. The former custodian no longer has authority over it.

  • Yes. UTMA funds can be used for education-related expenses, including college costs, as long as the spending directly benefits the student. However, it is important to note that UTMA accounts count as student-owned assets on the FAFSA, which can significantly reduce financial aid eligibility because student assets are assessed at a much higher rate than parent assets. After the individual reaches the legal age of termination, they gain full control of the account and may use the funds for college or for any purpose.

  • Only if those expenses were legitimately paid on behalf of the child and would have been proper UTMA expenses. Custodians cannot retroactively reimburse themselves for general support or parental obligations.

  • No. The funds must benefit the minor exclusively. Shared household or family expenses do not qualify.