Custodial Account For A Minor

You are able to hand over assets to a minor using the Uniform Transfers to Minors Act (UTMA) and/or Uniform Gift to Minors Act (UGMA). They offer a way to transfer securities to a minor’s account without needing an attorney to set up a trust. The UTMA is an extension of the UGMA and allows for gifts beyond that of cash or assets to include things such as real estate, royalties, or patents. Each state is allowed to adopt or amend the UTMA. While age limits can depend on the state, in general a UTMA allows a custodian to wait to hand over the assets until the beneficiary turns 25. Meanwhile, a UGMA requires the funds to be handed over when the minor turns 18.

Instead of requiring an attorney to set up a trust fund, you may open an UTMA/UGMA account yourself on behalf of a minor. This account is designed to protect and hold assets for the beneficiary while the creator has the option of appointing an institution or someone else to act as the custodian for the account. Oftentimes, a UTMA/UGMA account is opened to help fund a child’s future education costs with family members or friends donating money to the account throughout the child’s life. The custodian is then able to use these funds to invest them in a way that is in the beneficiary’s best interest. Once the minor becomes of age, the account in full is transferred over to them and they are free to use the funds in whatever way they please.

It is important to note that the federal government views the custodial account as property of the minor which can affect their financial aid eligibility. However, as long as it will be going towards the benefit of the minor, custodians can choose to withdraw UGMA and UTMA funds prior to filling out financial aid forms. As a result, this could help the minor to avoid losing out on financial aid in the future.

The UTMA/UGMA accounts are classified as property of the beneficiary. Consequently, taxes will need to be filed each year by or on behalf of the beneficiary for all unearned income. Dividends, interest and earnings from the investments inside the account are all classified as unearned income for the child. Requirements for tax filing will be determined on a number of things such as the account amount as well as the age of the beneficiary. Because the UTMA/UGMA is legally the property of the minor, it can be taxed at the child’s tax rate, which is often much lower than the parents, resulting in significant tax savings over time. For example, if the child’s unearned income is less than $2,100 and the child is 19 or 24* years or younger, parents can choose to report the income on their own tax return. The first $1,050 of earnings would be tax-free with the other $1,050 taxed at the child’s often favorable tax rate. However, if unearned income for the year exceeds $2,100, it will be taxed at the higher marginal tax rate of either the parents or the child’s with the minor needing to file a tax return that is liable to the guidelines set by the “kiddie tax”. Exceeding the annual $2,100 could also affect your own tax-rate by raising it to accommodate for your child’s unearned income. Please note that the possible implications of the kiddie tax are normally more complex than what has been previously described, which is why it is always so important to get professional advice from someone such as a tax accountant or a financial advisor to make sure any taxes don’t come as an unwelcome surprise.

^*So long as the beneficiary is a full-time student with unearned income representing less than half of their financial support, parents are still able to report their child’s unearned income up until the minor’s age of 24, instead of only 19.

While there are many differences between the two, a few common dissimilarities are outlined below:

• Funds from a 529 plan are not subject to income tax or penalties just as long as they are used towards qualifying education expenses. Meanwhile, custodial accounts have no restrictions on what the money can be used for so long as it is to the benefit of the beneficiary with all withdrawals typically subject to income taxes.
• The owner of the 529 is in charge of the funds inside, even after the child turns 18, while the custodial account is legally the property of the minor beneficiary and will be transferred to the minor once he/she reaches the age of majority.
• 529 plans use traditional pre-selected investments like that of mutual funds, whereas custodial accounts have more flexibility when it comes to choosing its investment structure.

Each of our advisors at Florida Financial are knowledgeable on custodial accounts for minors and can help guide you to make sure it is the right choice for you. Contact us today for a free consultation.