Wednesday, June 4, 2014
Parents are constantly looking for the best ways to gift and save money for their children. One option is to use a custodial account, which is established through the Uniform Transfer to Minors Act (UTMA) or the Uniform Gift to Minors Act (UGMA) based on state law. These accounts are usually funded by gifts from parents and grandparents.
A major advantage to custodial accounts is that they are simple and inexpensive. However, simplicity can come at a cost. For example, once you have gifted the assets to the account you cannot take them back. The assets belong to the child, but are controlled by the custodian until the child reaches the age that terminates the account.
Custodial accounts are commonly used to save for a child’s education, however, be aware that the assets in the account are considered for the child’s financial aid purposes, which could cause a reduction in the overall aid the student will receive.
If you plan to put large sums away for a child, consider establishing a trust, utilizing a 529 Plan, or other options to avoid some of the problems associated with custodial accounts. If you already have a large custodial account for a child, there are ways to mitigate problems that could arise in the future.
See Renee Andrews-Tushinski, What to Know About Uniform Transfer to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA) Custodial Accounts, Mondaq, June 3, 2014.