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Custodial Accounts Aren’t Old Fashioned | Chad Carlson

I love the 529 plan as a college savings tool, but I also think we shouldn’t forget the benefits of a traditional custodial account.

The notion that a custodial account (sometimes referred to as a UTMA account) is old-fashioned or out-of-favor misses the point. While UGMAs and UTMAs were traditionally one of the only account types for parents to save for a child’s education while taking advantage of the child’s potentially lower tax rate, I think they’re still a nice account for socking away dollars for new computers, a car for your teenager, (a hefty repair bill from a distracted teen-driver) or a summer in Europe for a high-school or college study-abroad program.

Too many moms and dads are paying for these big-ticket items out of pocket in real-time. Why not save for the little ones while they’re little, invest wisely, and let compounding work in their (um, your) favor? There are actually two types of “custodial” accounts. My preference is the UTMA. It is managed by a custodian like mom or dad. Grandparents, relatives and friends can contribute too. The UTMA law allows virtually any kind of asset, bank deposits, stocks, bonds, funds, insurance policies  or even real estate, to be transferred to your favorite little boy or girl. Income producing assets make a nice transfer asset since the donor’s income taxes may be lowered and the asset will now be taxed at the child’s rate which is often a lower bracket. The first $950 of unearned income is exempt. The second $950 is taxed at your child’s rate. In fact, only income in excess of $1,900 per year is taxed at the higher of the child’s or parents rates.

In Arkansas – the age of majority is 21. (Some states it is 18, so find out, first!) At 21, the child gains control of the assets and may use them as he/she sees fit. Good training on behalf of mom and dad and clear communication about “what this money is for” is critically important and can’t be overlooked. I’ve seen these account balances completely used up by Mom and Dad on expenses during high-school. I’ve seen other accounts used as a nest-egg for a down-payment on a home or as the beginning of a long-term savings plan. What a college graduation present, right!? Whether an UTMA is right for you is a child-by-child, family-by-family decision. I’ve always thought that mom or dad could simply threaten the forfeiture of a greater inheritance if monies are squandered. (That’s my personal plan.) Now keep in mind UTMA balances may affect the amount of financial aid your child receives. Custodians may, of course, as permitted by law, use UTMA assets for the child’s benefit prior to completing financial aid forms.

I use an UTMA account for each of my kiddos in compliment to their 529 plan. Rethink an old favorite. Don’t count out the UTMA.

Chad Carlson
Financial Advisor | Delta Trust Investments, Inc.
ccarlson@delta-trust.com

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