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Life Events :  Children

Under the Uniform Gifts (or Transfers) to Minors Act (UGMA/UGMT), you are allowed to move ownership of securities to your minor children by setting up a custodial account. As long as the account is in their name and they are a minor, anyone can establish a custodial account -- a parent, guardian, relative, or other donor.

The individual who manages the custodial account is known as a custodian. As custodian, they're responsible for investing and administering the account's assets. The custodian is the only person allowed to make transactions within the account -- it's their duty to use the money to pay for services that provide for the benefit and welfare of the child -- such as education costs or medical needs. 

All states offer UGMAs and many allow UTMAs. UGMAs are more restrictive in the kind of property that can be transferred (no real estate). Custodial accounts are governed by the states laws where the minor, parent, or donor resides. A child normally takes control of their account when they reach the age of majority which is 18 years of age for UGMA accounts. With an UTMA account, you can postpone distributions to your child as late as 21 years of age.

Kiddie Taxes

Children must file income tax returns for any income (earned or unearned) in their name -- including custodial accounts. The amount of tax is determined by the exact amount of income and the age of the child. Earned income is wages. Unearned income includes interest income, dividends, or any other appreciation resulting from assets in the account.

1) Unearned Income

Under age 14:
    $0-$700 (tax-free)
    $700-$1,400 (child's rate)
    $1,400 and over (parent's rate)

Over age 14:
    Any income (child's rate)

2) Earned Income

Under age 14:
    Any income (child's rate)

Over age 14:
    Any Income (child's rate)


What to Put in the Account

You have many choices:

• Individual stocks
  
• Growth mutual funds
  
• Index mutual funds
  
• Interest-bearing checking account
  
• Savings account
  
• Certificates of deposit (CDs)
  
• Dividend Reinvestment Plans (DRIPs)

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