I have received many questions from parents who want to gift money to their
children. Sounds easy enough, right? Read on...
Q: I want to give my children gifts of money and stock. What kind
of account should I deposit the funds into? A custodian account? A UGMA account?
And what are the tax consequences?
A: First, let me address the question of a custodial account vs. a
guardian account. In general, under a guardian or "in trust for" account,
the guardian (generally the parent), continues to be the owner of the money.
The guardian can withdraw the money for any purpose, and, most importantly,
remains liable for the taxes on the earnings. Under a custodial account,
the child is treated as the owner of the account, but the parent still controls
the investments in the account. In other words, any gains, income, or dividends
on the account are taxed at the child's level. In most cases, the use of
a custodial account is more beneficial for tax purposes.
Now then, you may have some "kiddie tax" issues relative to the earnings
of the children. Take a look at the Kiddie
Tax article here in the FAQ area in order to become more familiar with
the concept of the "kiddie tax" and how it really works before you make any
final gifting or investment decisions. Let's move on to the different types
of custodian accounts.
There are two major types of custodian accounts:
The Uniform Gift to Minors Act (UGMA) and
The Uniform Transfers to Minors Act (UTMA).
A UGMA account is a very convenient way for high-income parents to "shift"
some of their tax burden to the kids, or even save for the children's education.
But it also has certain limitations:
1. It can only be used for lifetime gifts (not gifts made by a will).
2. Only certain kinds of property are covered. You are limited to making
gifts of money, securities, life insurance, or annuities.
With a UGMA account, you (generally the parent) maintain control over the
money until the child reaches the age of majority (18 or 21, depending on
the state). Once the child reaches the age of majority, the parent no longer
has control over what is done with the money.
UTMA accounts work in the same way as UGMA accounts, except that UTMA accounts
let you, the parent, maintain control over the money for a longer period
of time -- for example, until the child finishes college. While UGMA money
is available to the child at the age of majority, UTMA accounts permit postponing
distributions until age 18, 21, or 25, depending upon the state.
Also, the UTMA account, unlike the UGMA, may be invested in real estate,
royalties, patents and paintings.
So who deals with UGMA and UTMA accounts? Where can you find them? Virtually
every bank and stock brokerage firm (both full-service and discount) deal
with these types of accounts on a daily basis. You should be able to set
up the account almost anywhere.
- Article 14
