A custodial account (under UGMA — Uniform Gifts to Minors Act, or UTMA — Uniform Transfers to Minors Act) is a financial account held in a minor's name but managed by an adult custodian until the minor reaches the age of majority.
UGMA vs. UTMA: - UGMA: Allows gifts of securities, cash, and insurance policies. - UTMA: Broader — allows gifts of real estate, art, patents, and other property in addition to all UGMA assets. Used by most states.
Key features: - Irrevocable: Once assets are transferred, the gift cannot be taken back — it belongs to the minor. - Custodian: Any competent adult (typically a parent) manages the account and must act as a fiduciary for the minor. - Transfer age: Usually 18 or 21 (varies by state); at majority, the now-adult gains full control. - One custodian, one minor per account.
Tax treatment ("Kiddie Tax"): - First $1,350 of unearned income: tax-free. - Next $1,350: taxed at child's rate (likely 10%). - Unearned income above $2,700: taxed at parent's rate (kiddie tax) until child is 18 (or 24 if full-time student).
FAFSA impact: UGMA/UTMA assets are counted at 20% as student assets (vs. 5.6% for parent assets), reducing financial aid significantly.
> Exam tip: The irrevocability of custodial accounts is key — once contributed, the money belongs to the minor. The kiddie tax applies to unearned income above $2,700 at the parent's rate. UTMA is the more modern and broader version.