Gifting Through Custodial Accounts: What Families Should Know About UGMA and UTMA Accounts
A custodial account can be a simple way to gift assets to a child, but before you contribute, it’s important to understand who owns the money, who controls it, and what happens when the child comes of age.
Today is part two in our series on gifting strategies. You can read the first post here. In the last article we laid the groundwork for the difference between minor trusts and minor custodial accounts. This week we will dive into the details of a minor custodial account and next week we’ll look at minor trusts.
As a brief refresher, 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. The legal framework for trusts is much more elaborate than for custodial accounts. Custodial accounts are more suitable for smaller transfers. Trusts are controlled by a trustee, while custodial accounts are controlled by a custodian.
Custodians
A transfer to a child under UTMA or UGMA requires the involvement of a custodian. This is an adult who will manage the property until the child reaches the age when control passes to the child. The person transferring property to the child can act as custodian or name another adult to act in that capacity. The custodian manages the property, making decisions concerning buying and selling, reinvesting earnings and so forth. The custodian may also take money from the account to spend for the benefit of the child.
Transfers
There are various ways to make transfers to a custodial account. If the property consists of cash or other financial assets (such as stocks and bonds), a common method is to open a custodial account at a brokerage firm with a designation something like this.
“John Smith, as custodian for Mary Jones, under the Ohio Uniform Transfers to Minors Act”
Ownership
Property held in a custodial account is owned by the child. Even though the child will not have control of the property until later, the child is the owner as soon as the property is transferred to the account. This fact has important consequences:
A gift is legally complete when cash or other property is transferred to a custodial account, not when the account terminates. You aren't allowed to change your mind and take the property back.
Income generated by assets in the account is the child's income.
Termination
The account terminates when the child reaches a specified age. The age depends on the particular state's law, and may depend on the type of transfer. In some states, you can choose to designate a different age than the one that automatically applies, but the law will impose a limit on the age you can choose. For example, in California, an account established by gift will terminate when the minor attains age 18 unless you specify a later age, up to age 21. (A custodial account established under a trust can terminate as late as age 25.)
When the account terminates, the custodian transfers the property to the child, who can use it in any way he or she chooses.
If you’re interested in learning more about using a custodial account to help with college planning, schedule a call with us today. Together, we'll build a plan that helps support your family's education goals while keeping your long-term retirement plan on track.
This content is developed from sources believed to be providing accurate information and is provided by GW Financial, Inc. It is not intended to be used as investment, tax, or legal advice. The information presented is for general education and informational purposes only and should not be construed as a solicitation or recommendation. Please consult with a qualified professional regarding your specific circumstances. This article may contain links to third-party websites for your convenience. GW Financial, Inc. does not control or endorse third-party content.
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