The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are sometimes called the “granddaddies” of college savings accounts. Both allow parents to establish custodial accounts for a minor child, and a grandparent can then make gifts to the account.

Who does a custodial account belong to?

A custodial account is a savings account that an adult manages for a minor, or a person under the age of either 18 or 21, depending on the state. Any financial decisions made about the account, such as the buying or selling of securities, must be approved by the custodian.

Is it worth opening a custodial account?

A custodial account can be an excellent way to make a financial gift to a child—whether your own, a relative’s, or a friend’s. This type of account, established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), is set up by an adult for the benefit of a minor.

Do kids pay taxes on UTMA accounts?

Because money placed in an UGMA/UTMA account is owned by the child, earnings are generally taxed at the child’s—usually lower—tax rate, rather than the parent’s rate. For some families, this savings can be significant. Up to $1,050 in earnings tax-free. Any earnings over $2,100 are taxed at the parent’s rate.

Who is responsible for taxes on a custodial account?

What are the tax considerations for custodial accounts? Any investment income—such as dividends, interest, or earnings—generated by account assets is considered the child’s income and taxed at the child’s tax rate once the child reaches age 18.

How does a UTMA account work for grandparents?

A uniform transfer to minors account, or UTMA, is a way that grandparents can put money away for their grandchildren. Sometimes called custodial accounts, UTMA accounts generally stay under the control of an adult custodian until the child reaches the age of majority.

Who are the granddaddies of college savings accounts?

Can a grandparent make a gift to a minor child?

Both allow parents to establish custodial accounts for a minor child, and a grandparent can then make gifts to the account. Because the account is in the name of the child, the tax liability is often shifted to the child, who presumably is in a lower tax bracket than the grandparent or the grandchild’s parents.

What happens if you open a custodial account for your grandchild?

On the minus side, once the grandkids are of age, you no longer have control of the assets. They can use the money however they wish. So while your intention may be to supplement their college cash or provide another enriching experience, there’s no guarantee they won’t blow the money on something frivolous.