Custodial Accounts

Money held in accounts set up under Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) must be spent on purchases that clearly are for the benefit of your minor child. The custodian cannot spend the money on anyone but the child.

The income earned in the account is taxed at the child’s lower marginal rate, if under state law the account legally belongs to the child and the parent is not permitted to use it to discharge support obligations. However, in the case of children under the age of 18, the unearned income (interest, dividends, etc.) taxable to the child will be taxed at the parents’ higher marginal rate. To the extent that income from the account is used for the minor child’s support, it may be taxed to the parent who is legally obligated for the support. State laws differ as to a parent’s obligation to support. The income will be taxable to the parent only to the extent that it is actually used to discharge the obligation.

Also, transfers under UTMA or UGMA generally qualify for the annual gift tax exclusion ($12,000). Finally, the value of the property transferred under UTMA or UGMA is includable in the estate of the donor (parent-custodian) if he or she dies while serving in that capacity.

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