Another way to build a college fund is to
open a custodial account in a child’s name under either the
Uniform
Gifts to Minors Act (UGMA)
or the
Uniform
Transfers to Minors Act (UTMA).
You can make annual tax-free
gifts of up to $12,000 to these accounts. If you and your spouse
both contribute, you can add $24,000 a year. Annual gifts over
$12,000 may be taxable.
UGMA and UTMA accounts are popular with parents
and grandparents for several reasons:
There are no limits on how assets
in the account are ultimately used as long as it’s
for the child’s benefit. If the beneficiary
doesn’t go to college or uses the money for
some other reason, there are no penalties.
The accounts are easy to open.
Most financial institutions offer them, and usually
all you have to do is fill out a simple application.
Building your account
You can add cash or securities. That means you can transfer assets that have
already appreciated in value or those that you expect to become more valuable
over time to the account. Since children over 18 pay income and capital gains
taxes at their own rate, which is usually lower than the rate their parents or
grandparents pay, less tax may be due on annual interest and dividend income
as well as on capital gains that result, for example, from selling assets to
pay tuition.
You, as custodian, have complete control over how the assets are invested until
the child reaches majority
— 18 in most states and 21 in others.
