Because individuals must be of legal age to own property, many parents
use custodial accounts as ways for moving funds and assets into their
The concept of custodial accounts was originally established under the
Uniform Gifts to Minors Act (UGMA). These accounts were an easy and legal
way to transfer the ownership of assets to a child. UGMA accounts were
fine for financial assets such as cash, bonds or stocks. Recently, most
states have adopted the Uniform Transfer to Minors Act (UTMA) that provides
some additional capabilities for the property to consist of real estate
or other more complicated types of property.
With a UGMA or UTMA account, the parent creates a custodial account on
behalf of the minor child. Assets are transferred into the account and
the custodian, usually a parent, manages the account until the child reaches
legal age. At that point, the child can do whatever he or she wishes with
These accounts are often used to save for college educations or to create
some net worth for a child. While they are usually established by a parent,
other adults (such as grandparents) can establish UGMA or UTMA accounts
and act as custodian.
Transfers are irrevocable
If you are considering transferring assets into a custodial account, remember
that the gift is irrevocable. You cannot change your mind later and take
the assets back. Your child becomes the owner when you make the transfer.
Most states set 21 as the age when the custodial accounts end. However,
some states set age 18, between 18 and 21 or between 18 and 25. Check
the laws of your state.
Gift tax implications
Transfers into a custodial account are just like any other gift. In 2018,
you can make annual gifts up to $15,000 in cash, securities or other property
to anyone without owing any federal gift tax and without filing a gift
tax return. The annual exclusion applies to each person receiving the
If you are married, gifts can be considered to be one half from you and
one half from your spouse. In other words, two parents can give up to
a total of $30,000 per year to a child without owing any gift tax. However,
a simple gift tax return may be required if you use this gift-splitting
technique. Consult your tax advisor.
Income tax implications
When the assets become the child's, any income the assets produce
is taxed to the child. There are special tax rules that apply to children
under the age of 18, 18 year olds with earned income less than half of
their support, and 19 to 23 year old students with earned income less
than half of their support. These rules are commonly called the "Kiddie"
The Tax Cuts and Jobs
Act of 2017 made substantial changes to the Kiddie tax and you may want
to consult your tax advisor to understand how the new rules may apply
to your child.
College Financial Aid
Using a UTMA or UGMA account to receive assets transferred from parents
may limit or reduce your child's ability to qualify for needs-based financial
aid to cover college costs. This is because many financial aid programs
require the student to use 35% of their assets for college before being
eligible for aid. The same programs may only require 5% of the parents'
assets to be used in the calculation. You may want to investigate this
if your child's qualifying for financial aid is going to be important.
Custodial accounts are an easy and convenient way to transfer funds to
children. There are limited income tax benefits and there may be negative
implications for your child's ability to qualify for college financial
aid. However, often the major factor to consider is that your children
will be able to use the funds as they please once they reach a certain
age. This is all the more reason to make sure your children have a proper