Custodial Accounts vs. Trusts: Which Is Best for Gifting to Minors?
Thinking beyond a 529 plan? Custodial accounts can be a valuable college planning tool—but understanding how they work is key to deciding whether they're the right fit for your family.
Hello Discerning Parents and Future Graduates,
Today, we delve into another essential chapter in our guide to mastering the financial maze of funding higher education. For all the Jills and Jacks navigating the delicate balance of funding their children's education without jeopardizing their own retirement dreams, this one's for you.
Gifting can be an excellent way to help children and grandchildren pay for college. Many people think first of the 529 plans. While these are great options, there are other gifting strategies to take into consideration. Today kicks off our short series on various gifting strategies to help parents and grandparents who wish to assist the young people in their life on their college journey.
Gifting Through Custodial Accounts
The Uniform Law Commissioners adopted the Uniform Gifts to Minors Act (UGMA) in 1956. The primary focus then was to provide a convenient way to make gifts of money and securities to minors. Later, it became clear that a more flexible law was desirable. The Uniform Law Commissioners adopted the Uniform Transfers to Minors Act (UTMA) in 1986. UTMA expands the types of property you can transfer to a minor and provides that you can make other types of transfers besides gifts.
Custodial Accounts vs. Trusts
Custodial accounts are similar in some ways to trusts. Both place property under the control of a person who isn't the beneficial owner — that is, the person who has the ultimate right to enjoy the fruits of the property. In the case of a minor trust, also known as 2503(c) trusts, a trustee manages the property for the benefit of the beneficiaries. In the case of a custodial account, the custodian manages the property for the benefit of the minor child.
Custodial accounts are not trusts. The whole point of UGMA and UTMA is to permit you to transfer property to a minor without establishing a trust. The legal framework for trusts is much more elaborate than for custodial accounts. Generally speaking, trusts are more expensive, complicated and time-consuming than custodial accounts.
There are good reasons to use trusts in many situations, however. Trusts provide greater protections and more flexibility. Generally, you should think of using a trust when you expect to transfer tens of thousands of dollars. Custodial accounts are more suitable for smaller transfers.
Financial Aid Treatment of UGMA, UTMA, & 2503(c) Custodial Accounts
Assets held in UGMA and UTMA custodial accounts are generally considered student assets when determining eligibility for need-based financial aid. Because student-owned assets are typically treated less favorably than parent-owned assets, it's important to consider how custodial accounts fit within your family's overall college funding strategy. A financial advisor can help evaluate whether a custodial account, 529 plan, trust, or another strategy best aligns with your goals.
Next week we’ll start our deep dive into each of these options. Join us then as we look at minor custodial accounts.
Until we decode more strategies for your financial success, remember, a thoughtful plan today illuminates the path of tomorrow. Eager to start crafting your family’s financial future? Schedule a Getting Acquainted Call with me. Together, we'll build a plan that helps support your family's education goals while keeping your long-term retirement plan on track.
Warm regards,
Julie Bray
Your Family's College and Retirement Champion
GW Financial, Inc.
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