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For grandparents
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I’ve been making direct gifts to my grandchild each year into a custodial account (UTMA) with the understanding that those funds are to be used for college. Is there anything wrong with this approach?
We’re certain the parents appreciate your generosity in making gifts into the UTMA for future your grandchild’s college expenses. The interest, dividends, and capital gains each year from the UTMA are reported under the child’s social security number. A dependent child can earn up to $1000 (in 2013) in investment income without having to file a tax return, and the next $1,000 is taxed at the lowest income tax bracket. Investment income above $2,000 is taxed at the parent’s bracket under the Kiddie Tax.
Most problems with UTMA and UGMA accounts occur when they grow too large. They are treated as student assets and therefore count heavily against eligibility for financial aid. They also become the direct property of the child at a certain age established under state law, and at that time can be spent for any purpose deemed desirable by your grandchild even if not considered desirable by you or the parents. Another consideration is the burden your gifts may place on the parents if the investments trigger a need to file income tax returns. The income tax savings of putting the money into the custodial account can easily be offset or exceeded by the cost of professional help in preparing a child’s tax returns.
Kiddie taxpayers include children under the age of 18 (as of December 31), 18-years-olds who are not self-supporting*, and full-time college students ages 19 through 23 who are not self-supporting.
*To be self-supporting, taxpayers must have earned income (i.e. wages) exceeding one-half their total support.
- How can I select the right 529 plan if I don’t know where my grandchildren will be attending college?
- What happens if I have money in a 529 account for a grandchild who later decides to not attend college?
- I would like to put some money towards my grandchildren’s college savings, but I’m worried about unplanned medical expenses or other financial needs I may have later on. Can I get my money back out of a 529 plan?
- Which investment option in the 529 plan should I choose for my grandchild?
- We have 16 grandchildren below college age. Should we set up a separate 529 account for each of them, or can we combine the savings into just one account?
- Instead of opening my own 529 accounts, can I just make contributions to the 529 accounts my children have already established for my grandchildren?
- How do Coverdell education savings accounts compare to 529 plans?
- If I ever need to go to a nursing home and apply for Medicaid benefits, will the 529 accounts I have set up for my grandchildren be counted as part of my assets?
- What happens to my 529 plan if I die or become incapacitated?
- Am I hurting my grandchild’s eligibility for financial aid by putting money into a 529 plan for him?
- My tax adviser is recommending 529 plans as an estate-planning vehicle. What is the advantage?
- I’ve been making direct gifts to my grandchild each year into a custodial account (UTMA) with the understanding that those funds are to be used for college. Is there anything wrong with this approach?
- My estate planner tells me I can reduce my estate by paying my grandchildren’s tuition and not even have to worry about the gift tax. So why should I use 529 plans?
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