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Dear Tax Talk,
I opened custodial accounts (was told they were UGMAs) for both grandchildren — first they were with a Young Investor’s Fund, now they are custodial accounts (CDs). One of the minors is now 18 years old; both accounts are under the minors’ Social Security numbers. When I close the account of the one who is 18 and give it to her, does she report the amount as earnings and pay taxes on it?
The basic way to give or transfer assets to children is to open an UGMA with a bank. An UGMA is the Uniform Gift to Minors Act, “uniform” meaning that the rules are pretty much the same from state to state.
Due to a minor’s limited authority under the law to contract or be sued, the gift act simplifies the transfer of assets to children without the need to establish a trust. While an UGMA has its simplicity, one drawback is that the child receives the account balance at the time they reach majority age, either 18 or 21. The child is then free to use the money as he or she sees fit. The person that created the account may be considered the custodian but has no legal say in how the child uses the funds.
When the account was created, you appropriately placed the child’s Social Security number on the account. The annual income from the accounts is taxable to the child and not to you as the creator or custodian.
A child is allowed to earn a certain amount tax-free every year, which has varied over time for law changes and inflation. I assume that the parents of the child have fulfilled the child’s tax obligations so that the maturity of the account would not in itself cause any further tax implication. This article discusses some of the more recent tax issues involving the taxation of minors. Assuming the child’s tax obligations have been satisfied, there is no tax implication from you turning over the funds to your granddaughter. Any interest the account earns during the current year should be included with your granddaughter’s other income.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
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