Accounts established under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) provide an excellent way for you to make a financial gift to children, whether they are your own, a relative’s or a friend’s. These types of accounts, set up by an adult for the benefit of a minor, are commonly referred to as custodial accounts.

Although the general principles for custodial accounts are the same across the country, the age when a child can take control of the account and assets (also called the “age of majority”) varies from 18 to 21, and is sometimes even older, depending on the circumstances and the state. Be sure to ask a financial consultant about the law in your state.

Here is basic, yet important, information about custodial accounts:

• Custodial accounts offer a convenient way to give financial gifts to minors. They are simpler to establish than trusts, which generally require more planning and the help of an attorney.
• In 2007, anyone can give a monetary gift of up to $12,000 (or $24,000 per couple) to each recipient without incurring federal gift tax. (This rule applies to custodial accounts as well as other forms of gifts.)
• As the donor, you can designate yourself or another adult to be the custodian of the account. If the donor acts as the custodian, the account value will be included in the donor’s estate for estate tax purposes if the child dies before the age of distribution. The custodian has sole responsibility to manage the assets for the minor until the custodianship ends, usually when the minor reaches the age of 18 or 21, depending on the state. The custodian is also empowered to make withdrawals from the account, but only if the money is spent for the use and benefit of the child. If the custodian is the child’s parent or legal guardian, then it is advisable that the custodian seek advice from a financial consultant regarding allowed distributions before making any withdrawal from the account for the benefit of the child.
• Money and assets deposited into a custodial account immediately become property of the child. This is not revocable. In other words, you can’t change your mind and take the assets back. If circumstances arise that require a change, the custodian should seek legal advice before making any changes.
• The account must be turned over to the child once the custodianship ends. (At that time, the custodian’s access to the account may be restricted.) Then, the child will have complete control over the account. He or she may choose to sell any investments in the account, or close the account and request a check for the proceeds. Alternatively, he or she may convert the account to his or her own name, establish the custodian as a joint account holder or grant the custodian power of attorney on the account.
• Any investment income—such as dividends, interest or earnings—generated by account assets is considered the child’s income and taxed at the child’s tax rate once the child reaches age 18. If the child is younger than 18, the first $850 is untaxed, and the next $850 is taxed at the child’s rate. Anything over $1,700 is taxed at the parent’s rate. See the Taxes section for more details.
• All custodial assets must be used “for the use and benefit of the minor.” While this may be subject to interpretation, it’s clear that custodians should never use the money for expenses unrelated to the child’s interests, or for day-to-day living expenses and other expenses the custodial parent or legal guardian is legally obligated to pay.
• If you want to transfer a large sum of money to a minor (for example, tens of thousands of dollars), doing so as part of a comprehensive estate plan involving a trust is often a better choice.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of accounts and strategies mentioned may not be suitable for everyone. Before establishing an account, you should carefully consider your objectives and other ways you may achieve them.