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If my understanding is correct, then the tax benefits of a custodial brokerage account are (in 2023):

  1. Sheltering of up to $2200 of unearned income / year
  2. Avoid gift taxes on gifts up to $15,000 / year

However, it seems like these amount to very little benefit in practice:

For (1) only the first $1100 is untaxed, and the next $1100 is taxed at the child's rate (10-12%). Even if the entire $2200 were untaxed, we are only talking about saving maybe $800 a year. Additionally, to claim $2200 in unearned income, there is some management work needed in order to realize the income.

For (2), unless you have a large estate (~$12 million), your child won't ever actually pay any gift tax.

Lastly, a custodial brokerage account is attributed to your child by FAFSA, which could reduce aid by ~ 20% of the value of the brokerage account -- which could eclipse the very minor tax benefits offered in the first place.

All together, it seems like there isn't really any financial benefit from these accounts -- or am I missing something?

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  • to evaluate the usability of the account, you have to know why the money is being invested. What is the purpose of the account? Jul 24, 2023 at 15:03
  • @mhoran_psprep My main thinking is saving for a first-home down payment. However, given it's generality, it could also be used to fill-in-gaps if our 529 plan doesn't fully fund education, or purchasing a first car, etc.
    – Zach
    Jul 24, 2023 at 15:35
  • The issue for the first home, or car is that once the child gets the money they can spend it on anything they want. They don't even have to use it for education. Jul 24, 2023 at 16:45
  • @mhoran_psprep That is true .. but naively I don't think a major cause-for-concern for us. There will be some informal guidance on what this money is for, and if they go rogue at 18 at spend it on other things .. then I think we have bigger issues.
    – Zach
    Jul 24, 2023 at 17:10
  • @Zach have you considered a trust instead? Do you have to gift them the money?
    – littleadv
    Jul 24, 2023 at 22:45

1 Answer 1

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The UGMA/UTMA accounts are not to provide tax benefit to the parents, they're to provide funds and protection to the children. The assets in these accounts do not belong to you, they belong to the child. Which means that as the custodian you have fiduciary duty to the child and should only use the funds to the child's benefit. Downpayment on a house where the child will live may or may not be a valid use case, but using child's money for the downpayment may also create child's ownership in the property.

In addition, adding funds to these accounts creates a gift to the child, which may trigger gift tax requirements (filing form 709, reducing your lifetime exemption, etc).

You should talk to a lawyer and a tax advisor.

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  • Thanks for the response. "[..] they're to provide funds and protection to the children" -- I see. I was pointed towards these accounts as a means to help save for your child's future (we are new parents), but didn't consider that it wasn't their primary purpose. With that re-framing in mind, then the fact they don't offer any tax advantages makes sense.
    – Zach
    Jul 25, 2023 at 15:53

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