Set Up a Kid's Account

The Nuts and Bolts of UGMAs and UTMAs

Your state has either a Uniform Transfers or Gifts to Minors law. These laws were established by states to make transferring assets to children relatively easy.

  • You or your spouse opens the account in the name of each child and is the account's custodian. Also remember to name a successor custodian in the event of your death.
  • The child's social security number is used as the account's tax ID number. The money belongs to the child, but you manage the account.
  • Assets in the account are irrevocable -- you cannot withdraw them later.
  • All states allow either gift or transfer accounts. With a gift account, you can earmark cash, bank accounts, stocks and bonds for the child.
  • With a transfer account, in addition to the same financial instruments allowed by the gift account, you can also hold real estate and other property.
  • Assets become the child's property when she reaches legal adult age (18 or 21, depending on your state's legal-age law). One thing to remember here: Once the child reaches legal age, she can do whatever she likes with the cash, and there's no way to predict how responsible (or irresponsible) she will be.

Know the 'Kiddie Tax' Rules

How much -- if any -- tax will you pay? Any gift to a child's trust or custodial account over $10,000 is considered a taxable event. The 'kiddie tax' comes into play once the account begins to earn interest. If your child has no other income and is under age 14, the first $700 of investment income falls into the child's zero bracket. The next $700 is taxed at 15 percent, and the rest is taxed at the parents' top bracket.

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