Many parents are looking to find the best way to gift and save money for their children. There are various options, including 529 Plans, trusts and custodial accounts. This article addresses the advantages, and sometimes significant disadvantages, of custodial accounts.

Custodial accounts are generally established through the Uniform Transfer to Minors Act (UTMA) or the Uniform Gift to Minors Act (UGMA) based on state law. These accounts are commonly funded by gifts from parents and grandparents.[1]

The major advantage to custodial accounts is that they are very simple and inexpensive to establish and maintain.  However, there are costs to this simplicity. For instance, once you have gifted the assets to the account you cannot take them back. The assets now belong to the child, but are controlled by the custodian until that child reaches the age that terminates the account.

For UTMAs established in Illinois, all assets must be turned over to the child once they reach age twenty-one.[2] This means that the assets are legally theirs and they can do whatever they want with the money. If you intend this money to be used for education, you may not be delighted when your child chooses to tour Europe for a year and bring a friend, all with the money you saved for them. Also, the funds cannot be transferred to another child. Comparatively, with a 529 Plan or a trust, you can use excess funds for another sibling if the first child does not need them for their education.

When setting up these accounts, you need to ask yourself these questions: “Do I want my 21-year-old child to get all these assets outright and without restrictions? What if they do not go to college or drop out?”

As a common reason to use these accounts is to save for a child’s education, be aware that the assets in the account are considered the child’s for financial aid purposes; this could cause a reduction in the amount of financial aid the student will receive.

If you plan to put large sums away for a child, you should consider establishing a trust, utilizing a 529 Plan, or other options to avoid the problems mentioned above. If you already have a large custodial account established for a child, we can discuss ways to mitigate these problems such as, placing the custodial account assets in a 529 plan, moving the assets to trust, or investing in a partnership or other vehicle that may restrict access to the funds for a longer period of time. If you would like to discuss your options for college savings plans, contact Renee Andrews-Tushinski at 312.670.7444.