on Nov 29th, 2009UGMA accounts
If you are going to start saving for a child’s education, I urge you to keep the money in your own name, not the child’s. The main reason for this is that you never know if Johnny Angel is going to turn into Johnny Wild Thing—and if he does, having a lot of money in his name when he reaches the state-sanctioned age (eighteen, twenty-one, or twenty-five, depending on where he lives) can do more harm than good. I’ve seen it happen.
Many people open what’s called a UGMA—uniform gift to minors account. There’s a tax break on money contributed to these accounts, but there are also drawbacks to them. First, it’s the child’s money, and you are just the custodian for it until he or she turns eighteen, at which time you legally have to turn it over to him. So it is far wiser, in my opinion, to have a fund for him that’s kept in your name. That way, if things don’t go as you hoped they would, you can reconsider what you want to do with these funds.
If you’re opening a UGMA for the tax break, you’ll find it is not really that great a savings. Very likely you’ll be investing in good growth-oriented mutual funds, which you’ll keep for many years, which in turn will make the tax consequences negligible. In a UGMA account, until the child is fourteen only the first $650 is not taxed; the rest will be taxed according to the parents’ tax bracket anyway.
Another big reason not to open a UGMA account is that it will be harder for you to qualify for financial aid, should that need ever arise. To determine how much financial aid you can qualify for, your assets will be taken into consideration. Assets in your child’s name will have to be used at the rate of 35 percent. If you have accumulated $50,000 in the UGMA account,
your child will have to contribute 35 percent of that, or $17,500, before financial aid could kick in. If the tuition was
$15,000, you wouldn’t be able to qualify. But only 6 percent of the parents’ assets are taken into consideration, so if instead you have kept that $50,000 in your name, just $3,000 of that money will have to go for tuition. This leaves the just-in-case possibility that $12,000 in financial aid could be granted. This is a big difference.