custodial accounts for minors and children

2004 Archives
Tax filing organization tips
Custodial Accounts
Saving on house energy bills
Cutting monthly expenses
Power of compounding
Online coupon shopping
Contributing to 401k's
Grocery shopping savings
Roth vs traditional IRA
Increasing your home's value
Dollar cost averaging
Setting financial goals

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Custodial Accounts (UGMA/UTMA)
November 2004

This month's newsletter has to do with the Custodial accounts to setup for your children. The most common custodial accounts are:

  1. UGMA - Uniform Gift to Minors Act
  2. UTMA - Uniform Transfers to Minors Act

These account types have advantages and disadvantages that you should understand and carefully consider before you start saving for your children. Most of these issues center around tax consequences, control and ownership issues and what the funds can be used for.

The main differences between the UGMA and the UTMA based upon the types of investments each account may hold. The UGMA accounts may only hold marketable securities, such as stocks, bonds, mutual funds, CDs, etc. A UTMA account may hold those same securities as UGMA's as well as real estate, art, jewelery, etc.

Who owns a custodial account?

Your children own the account. While your children are still kids (until they reach the age of majority (18 or 21 depending on your state) you control the account. By law children may not own securities so you have to hold them in their name. When your children turn 18 or 21, they can take that money and do anything they wish with it.

After all, they own the account and it's their money. You would hope that at this age, your kids will be prudent with the money and use it for education, purchase of a home, etc. Your child could also spend their account on beer binges, vacations, etc. This is the major factor that CAN be a problem with custodial accounts. Another major disadvantage is you can not change beneficiaries. What if you set up a UGMA for your son's education and he gets a college scholarship? You can not change the beneficiary to your daughter.

Since your child is the owner of the account, any capital gains or dividends are taxed at your child's tax bracket. This will most likely be the lowest tax bracket and certainly lower than your tax bracket. As a parent, what you have done is given up ownership of these funds for the benefits of lower taxation, allowing the money to grow and compound much faster.

Also, unlike 529 savings accounts, this money does not have to be spend on just education. This money can be spend on absolutely anything you or your child wish.

Look into these accounts as a supplement or replacement for the 529 Education Savings Accounts that I covered in a previous newsletter if the advantages of the UGMA/UTMA outweigh the advantages of the 529 plans.

Here's another way to save for your children!

When I first found out about Upromise I was so excited! Why? Because you can save for your children's education just by doing what you are already doing! When you sign up, a portion the money that you spend already on gas, groceries, resturants, online shopping and more get's deposited in your account for their school expenses! It's a completely free way to help you save for college.

With Upromise, a portion of the money you and your friends spend every day on groceries, resturaunts and and much more will go into an account for your children's college! Upromise - FREE Money for College!


Todays Tip!

I've saved thousands for my kids college fund without contributing one cent!

Click Here to Find Out How!