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Education Planning

Custodial Accounts

Should you save in your name or your child's name?

There are advantages and disadvantages in saving in either your name or your child's name.

Saving in your own name

Advantages Disadvantages
  • Simple approach
  • Parents retain complete control of the money.
  • Funds may be used for any purpose.
  • A smaller percentage of funds in your name (5%) is expected to be allocated for your child's college expenses.
  • Parents cannot take advantage of the tax savings that could be realized from a custodial account.

Saving in your child's name

Advantages Disadvantages
  • Easier and less costly than establishing a trust.
  • Parents have the flexibility of giving as much or as little as they want.
  • Parents may still choose the investments they want funds invested in.
  • Tax advantages if a custodial account is set up in the child's name.
  • Parents lose the future right to the assets.
  • Once a child reaches majority, he/she may use the money for any purpose.
  • May impact child's eligibility for financial aid. Current calculations for financial aid expect that a child will need to spend 25% of his or her savings each year on school expenses.

UGMA/UTMA Accounts

When you save in a child's name, you will open an account under the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA), depending on which provision your state has adopted. There are a few rules when opening an UGMA/UTMA account:

  • The transfer of assets into the account is irrevocable.
  • The child owns the assets and gains full control of the account upon reaching the age of majority.
  • Cash and/or securities may be transferred into an UGMA or UTMA account.
  • You must file an income tax return for your child to report any income generated through the account.
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Funding and Investments

With an UGMA/UTMA account, you have complete funding flexibility: You may give the child up to $12,000 per year ($24,000 per couple) without incurring a gift tax, or you may forego contributions for any year—the choice is yours.

You have many options for how the child's money is invested, as long as you are living up to your fiduciary responsibilities by choosing investments that are appropriate for safeguarding the assets and meeting the goals of the child.

Taxation of Custodial Accounts

The tax benefits of using a custodial account for education savings have become less attractive recently. Before taking any action, talk to us about whether other alternatives, such as 529 College Savings Plans, might better serve your needs. In fact, you may wish to convert an existing custodial account to a 529 College Savings Plan. We can show you how.

  • Children with investment income are subject to specific tax rules that include the “kiddie tax,” which equals the parent's highest marginal tax rate. Children with earned income from employment may be taxed differently. In all cases, you should check with your tax advisor before putting money in a child's name.
  • Interest income is taxable at ordinary income tax rates.
  • Under current legislation, the capital gains and dividend tax rate is eliminated for the 2008, 2009 and 2010 tax years for taxpayers in the lowest tax brackets.

Additional Information

The government has many other tax-advantaged means to save for college. You may also qualify for a host of attractive education tax credits and deductions depending on your adjusted gross income. In order to be sure you are taking advantage of all the programs for which you are eligible, be sure to speak with your tax advisor.

For more information, please contact your Financial Advisor.

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