From October 14, 2009
Custodial accounts under the
Uniform Transfers to Minor Act
(UTMA) are often used to save
for a child's college education
or to help parents reduce their
income taxes. Basically, you set
up an account for your child,
naming yourself or someone else
as custodian. In 2010, you can
transfer a certain amount each
year, $13,000, or $26,000 if the
gift is split with your spouse,
with no gift tax implications
(figures are unchanged from
2009).
Any income generated on those
gifts is your child's income,
taxable as follows under the "Kiddie
Tax" rules:
-
For children under age 19 in
2010, the first $950 of
unearned income is generally
tax free, the next $950 of
income is taxed at the
child's tax rate, and the
remaining income is taxed as
the parents' marginal tax
rate (figures unchanged from
2009). A child's unearned
income below the applicable
threshold is taxed at more
favorable rates.
- Under current law for calendar-year individuals, the Kiddie Tax rules can potentially come into play until the year an affected child reaches age 24. However, the new age-24 rule only applies to certain students. If the Kiddie Tax affects your child, part of his or her unearned income (typically from investments) will be taxed at your higher marginal federal income tax rates instead of at your child's lower rates.
Once assets are transferred to the UTMA account, they become the child's assets and cannot be taken back. The custodian manages the property for the child's benefit until control passes to the child (typically 18 or 21, depending on your residence state). When the child reaches that age, the account terminates and the assets transfer to the child's control.
UTMA accounts are fairly easy to set up, but you should consider several factors before doing so:
-
Assets in
the UTMA are considered your
child's when applying for
college financial aid. Under
present financial aid
formulas, 35 percent of your
child's assets must
generally be used for
college education costs,
while only 5.6 percent of
your assets must be used.
-
Since you
can't take the assets back,
make sure you won't need
those funds in the future.
-
Once
control passes to your
child, you can't control how
the money is spent. While
you may hope that your child
uses the funds for things
like funding college or
buying a home, at age 18 or
21, your child may have
different ideas for the
money.
- There are other ways to save for your child. If the amounts being transferred are substantial, you might want to consider a trust, which gives you more control over when and for what reasons funds are distributed to your child. If you are saving for college, perhaps a Section 529 plan or education savings account would be a better alternative.
