By Keith Driscoll, Financial Consultant
Salomon Smith Barney

While planning your children's education expenses, it is important to consider gifting to a custodial account under the provisions of the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA).

Gifts under either of these Acts constitute an irrevocable transfer of assets from the giftor (not limited to family members) to the beneficiary. All investment decisions made on behalf of the beneficiary must reflect his/her primary objectives and not those of the giftor.

There are a number of positive and negative attributes associated with UGMA/UTMA accounts.

Benefits of UGMA/UTMA

• For children under the age of 14, the first $700 of income generated in the account is tax-free. The next $700 is taxed at the child's rate, usually 15%. Any income in excess of $1,400 is taxed at the parent's rate. After the child reaches age 14, any income generated by the account is taxed at the child's rate.
• Each person may contribute up to $10,000 per year ($20,000 per couple) without incurring a gift tax.
• Monies do not have to be used for educational purposes

Drawbacks of UGMA/UTMA

• Transfer of assets is irrevocable
• The child owns the assets and full control of the account upon reaching the age of majority (between 18 and 21, depending on the state).
• Money may not be used to fulfill parental obligations.

Due to the numerous drawbacks involved with using a UGMA/UTMA, the IRS established Section 529 (College Savings Plan) of the Internal Revenue Code.

Coming up Next...
Come back for College Savings Plans Part I.

Meeting Your Goals
Contact Keith Driscoll, Financial Consultant, at Salomon Smith Barney with any questions or comments. Please call 800-336-0156, or email keith.p.driscoll@rssmb.com, for a complimentary consultation on college expense funding.

Salomon Smith Barney does not provide tax or legal advice. Please contact your tax or legal advisor for guidance.

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