I teach a free parent seminar called “Paying For College,” and parents often ask me about Uniform Gift to Minors Accounts. These accounts may sound like a good idea, and they’re fine for income or estate tax planning. But when it comes to federal financial aid planning, a Uniform Gift to Minors Account is a terrible idea.
Let me explain.
Generally, children cannot transact financial business on their own –other than a simple bank account – without the appointment of a guardian. So in the 1950s, the Uniform Gift to Minors Act (UGMA) was created. The goal was to draft a model law for states to adopt to provide a convenient way for people to make gifts of money and securities to minors. In 1986, the Uniform Transfer to Minors Act (UTMA) was created to expand the types of property that could be transferred to a minor, e.g. real estate and limited partnerships.
Under the UGMA/UTMA, parents can make gifts to children through the use of custodial accounts. Custodial accounts are basically simplified trusts that are created by statute instead of through trust agreements. In lieu of a trustee, a custodian is named to manage the property until the age at which control passes to the child. Parents making gifts to their children can name themselves or another adult as custodian. The custodian has a fiduciary responsibility to handle the assets in a prudent manner for the child’s benefit.
When the child reaches a specified age, he or she can claim all of the account assets – even if that is against the wishes of the parent donor or the custodian. In Texas, the age of majority is 21. Gifts to a child under UGMA/UTMA constitute completed gifts for gift tax purposes and qualify for the annual gift tax exclusion, which in 2017 is $14,000 per parent or $28,000 if from both parents. Income earned on the assets in the custodial account is taxable to the child and subject to the “kiddie tax” if the child is under 24.
What does that mean? For federal financial aid planning, gifts to a child under UGMA/UTMA count as that child’s income and assets for assessment purposes for the Expected Family Contribution. And of course, the higher the Expected Family Contribution, the less likely a child is to receive financial aid.
Questions? I’d love to hear from you. Please feel free to reach out to me via email, or call me at my office at (713) 785-8939. If you’re interested in learning more about my “Paying for College” seminar, I’d be happy to discuss it with you.
Thank you for reading,
Robert Stevenson, CPA