Before 529 plans, the Uniform Gifts for Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA) were the most tax-efficient ways to save for college and transfer wealth to children and grandchildren.

The Uniform Gifts for Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA) are similar in almost all respects.

UGMA and UTMA accounts are a way for children who are not of age of majority–younger than 18 in most states and 21 in others–to own securities (stocks, mutual funds, bonds, etc.).

Control of accounts

With an UGMA/UTMA account, the individual who is responsible to oversee and manage the account is referred to as the "custodian." (The person who opens the account doesn't have to be the custodian.) The custodian is legally bound to judiciously manage the funds in the UGMA/UTMA account: He or she cannot use the funds to bet or gamble, for example.

On reaching the age of majority, the minor can assume control over the account without the custodian's consent.

Tax implications

• UGMA/UTMA is subject to a gift tax exclusion that allows an individual to give up to $11,000 per year to another person without being subjected to the gift tax.
• The first $750 in earnings each year is free from federal taxes and the next $750 is taxed at the child's tax rate. Afterward, earnings are taxed at the normal rates.

UGMA and UTMA accounts can be rolled over into 529 plans: This is popular because of the more generous tax benefits and account ownership flexibility.

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