Gifting Wealth to the Next Generation: Choosing the Right Account

Families often think of gifting funds to future generations as a way to help pay for education — but the potential benefits can extend well beyond the classroom. A gift to a child or grandchild may help reduce the size of a taxable estate while supporting important goals for the next generation, whether that means funding education, purchasing a first home, starting a business, or covering other early-adult expenses.

For many years, the question of funding accounts for your children and grandchildren came down to UTMAs or UGMAs versus 529 plans. With the introduction of 530A accounts (also known as Trump Accounts) in 2026, a third option is now in the mix. Each account serves a purpose, but it’s important to understand the characteristics before making irrevocable gifts. In this article, we’ll explore all three options and help you determine which one is correct for your situation.

The Value of Starting Early

One of the most meaningful gifts a family can make is the gift of time. When money is invested early, it has more time to grow and compound. The illustration below shows the potential difference between investing $1,000 at birth and investing the same amount at age 18. Even a relatively modest gift can have a meaningful impact when it is invested early and given time to grow (Figure 1).While particular returns are not guaranteed, this chart demonstrates the potential benefit of giving an investment more time to compound. The appropriate account and investment strategy will depend on the family’s goals, time horizon, tax situation, and desired flexibility.

UTMAs/UGMAs

Uniform Transfers to Minors Act and Uniform Gifts to Minors Act accounts — generally referred to as UTMAs or UGMAs — are custodial accounts established for the benefit of a minor. These are irrevocable gifts made to a taxable brokerage account for minor children that are managed by an adult custodian until the child reaches the state’s age of majority (18 or 21).

How they work:

• No contribution limits — annual gift tax exemption applies to contributions
• Kiddie tax rules — $1,350 of dividends and capital gains are tax-free, next $1,350 taxable at child’s marginal rate, beyond that taxed at child’s parents’ marginal rate
• The funds can be used for any purpose so long as they’re for the benefit of the minor child
• At age 18 (or 21) depending on your state’s age of majority, the assets become the property of the minor and must be converted into a brokerage account in their name
• You can open an UTMA with any custodian and there are no limitations to your investment options
• Effect on financial aid: these accounts are considered assets of the child, which can adversely impact benefits

When might an UTMA/UGMA be appropriate?

You are interested in creating a taxable account that can be used by your next generation for expenses like purchasing a home, funding a business, or starting a family.

Financial Planning Tips

• There is a benefit to harvest gains each year (no wash sale rules) and immediately repurchase the same investments to help your child have a higher basis (less unrealized capital gains) once they gain access to the funds (the applicable tax rules may allow dividends and gains to be realized annually up to a specified threshold, which is currently $2,700).
• Begin financial education early with minor child to ensure they steward the funds once
  they’re received.
• Rather than raise cash to make contributions, you can also transfer taxable securities in your brokerage account to fund UTMAs.

529s/Education Savings Accounts

A 529 plan is a tax-advantaged account designed primarily to help pay for qualified education expenses.

How they work:

• State-sponsored education savings programs that are managed by an adult custodian for the benefit of a minor child
• Gifts are limited to the annual gift tax exclusion ($19,000 or $38,000 for married couples)
• Assets in 529s grow tax-deferred and are tax-free if used for higher education expenses
• New rules for Roth IRA rollovers if left with unused funds — lifetime maximum of $35,000
• Funds withdrawn for non-qualified expenses incur a 10% penalty and are fully taxable to the recipient
• The account is portable to other individuals in same family
• 529 investment options are limited, normally to age-based or static portfolios. Age-based portfolios will start aggressive and get more conservative as the child approaches college, while static portfolios enable you to choose the investments and make trades twice per year.
• Up to $20,000 of 529 funds can now be used to pay for K-12 expenses per student per calendar year
• Effect on financial aid: 529 assets are considered parental assets, which have a small impact on the government’s financial aid eligibility

When might a 529 plan be appropriate?

You are interested in tax-deferred growth and would prefer that your money be used for education.

Financial Planning Tips

• You can supercharge 529 contributions and pull forward gifting with five years at once
• The 10% penalty on non-qualified distributions can be waived if the child attends a US military academy or becomes disabled. In addition, if the child receives a scholarship, an equal amount can be withdrawn from the account penalty free.
• Your state may offer a state tax benefit for contributions made to 529s — it’s often good to review that plan first before exploring other states or national options
• 529s owned by grandparents are not included in the student aid index calculation

530A (Trump Accounts)

530A accounts, also known as Trump Accounts (TAs), are a new type of individual retirement account for eligible children. The accounts are intended to provide a long-term savings vehicle that can remain invested beyond childhood.

Eligible children born between January 1, 2025, and December 31, 2028, may qualify for a one-time $1,000 federal pilot-program contribution, subject to applicable eligibility requirements. Contributions from individuals and employers are also subject to annual limits.

How they work:

• Additional contributions are limited to $5,000 per year from all sources until the child turns 18
• Contributions are made with after-tax dollars, but grow pretax within the account
• Employer contributions made on a pre-tax basis ($2,500 cap)
• The funds must be invested in mutual funds or ETFs that track the S&P 500 or another similar index of US securities
• Amounts generally can’t be withdrawn before Jan. 1 of the calendar year in which the child turns 18 — after that point, the account must be converted to an IRA and follow the same withdrawal restrictions (10%penalty if withdrawn prior to turning 59.5)
• The new Form 4547 can be used to establish a Trump Account when filing taxes or it can be done online
• Website with more details: Trump Accounts — Jumpstarting the American Dream
• Some contributions will be subsidized by states
• Financial aid impact: Accounts are considered student assets, which can reduce need-based aid eligibility by 20% of the asset value (official guidance is pending)

When might a 530A Account be appropriate?

You are interested in tax-free growth and don’t want your funds directed towards education.

Financial Planning Tips

• Contributions to TAs do not affect contribution limits on other tax-advantaged retirement accounts such as Roth IRAs
• The funds can be withdrawn at age 18 without penalty to cover higher education costs
• A Custodial Roth IRA may be a better option for kids under age 18 who have earned income — even from non W-2 jobs like lifeguarding or babysitting. You’ll just need to maintain a simple log of their earnings and can contribute 100% of those earnings up to the max of $7,500 for 2026.

At a Glance Comparison of the Three Options:

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