These are accounts set up by an adult for a minor under a state's uniform gifts to minors act (UGMA) or uniform transfers to minors act (UTMA). The money in the account actually belongs to the child (minor) from the date it is deposited. This means it is a completed gift for gift tax purposes. The problems with these accounts (which you're usually not informed of when you open one) are significant. They don't have the tax saving features of Code Section 529 savings plans. The minor, under many state laws, can demand an accounting of how the funds are used from age 14 (would you really want that?). These accounts are subject to tax at the child's parent's income tax rate if the child is under age 14 (the Kiddie Tax). If you die and are listed on the custodian account as the named custodian all the funds are taxed in your estate. While there are appropriate uses for these accounts, consider the options (trusts, 529 Plans, etc.) before proceeding.
Subscribe to our email list to receive information on consumer webcasts and blogs, for practical legal information in simple English, delivered to your inbox. For more professional driven information, please visit Shenkman Law to subscribe.