This post is the third in a series of posts highlighting college savings options. I’ve blogged recently about the Coverdell Education Savings Account and the 529 Plan. Today, I’d like to turn the spotlight on the custodial account.
A custodial account refers to an account under the Uniform Transfers to Minors Act and the Uniform Gifts to Minors Act. However, North Carolina’s Uniform Transfers to Minors Act (NCUTMA) superseded its Uniform Gifts to Minors Act in 1987. Essentially, NCUTMA is a more flexible statute and provides for a wider assortment of property that can be held for minors.
Perhaps the primary attraction of a custodial account is its simple set up and management. NCUTMA provides a list of property and the procedure for converting each property type into custodial property. Generally, a transfer of property to the person or institution who will serve as custodian of the property for a minor child accomplishes the desired conversion. NCUTMA also includes sample language that must be used as well as a sample form that may be required in certain circumstances to establish a custodial account. Afterward, the custodian can direct the investment of the custodial property and determine how the account is used to benefit the child.
Several possible disadvantages exist. First, custodial accounts are currently taxable. You do not get the tax-deferred growth as you do with a Coverdell ESA and a 529 Plan. Second, a custodial account is terminated and property is distributed to a beneficiary who has turned 21, or in some cases 18, which can be an unsettling thought for parents. Third, custodial property may impair the beneficiary’s financial aid eligibility since the custodial account is considered the child’s asset for financial aid purposes. Finally, if your goal is to remove property from your estate for estate planning purposes, then avoid funding a custodial account and serving as its custodian. Otherwise, the account will be counted in your estate if you die before the beneficiary turns 18 or 21 and the account is terminated and property is distributed.
A custodial account may be an easy way to set aside property for college savings. However, be sure to consider the potential disadvantages listed above as the amount of property increases beyond modest levels. For more information on custodial accounts and the NCUTMA, please contact our office today at (704) 887-4944 or firstname.lastname@example.org to schedule a consultation.
Starrett Law Firm is a Charlotte estate planning, probate, and business law firm in Ballantyne that serves clients across the greater Charlotte area and North Carolina. We help clients understand complex legal principles and make sound decisions that protect them as well as their families or businesses. For more information about the firm, please visit our website at www.starrettlawfirm.com.