Is giving money to a custodial (UTMA) account a good idea?

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.