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Custodial Accounts for Minors: Pros and Cons

02-01-2005 - One of the simplest and least expensive ways to set aside money for a minor child is to establish a custodial account for her.  But if you're transferring a substantial sum, there may be a better way.

A custodial account created under the Florida Transfers to Minor Act (UTMA) is irrevocable.  So it you put a significant sum into it and at some point you yourself need the money -- even as a temporary loan -- it will not be available to you.  Another drawback of the UTMA is the fact that the child automatically gains access to the asset at age 21.  At that point, the child has complete control over the funds and can decide how it is to be used.  You may envision your child or grandchild using the money prudently, perhaps on education.  But do you really know whether any child will have developed sound fiscal judgment at the age of 21? Your hard-earned monies may end up being used for something frivilous.

Two other issues to consider: a large UTMA account can work against the child if he/she ever applies for college financial aid.  And the money will be considered part of your taxable estate if you die before the child is 21 and you are the custodian of the account.

If you have already established a custodial account for a child, techniques exist that may permit you to undo this technically irrevocable vehicle, and place the assets elsewhere. Fortunately, there are a number of alternative methods available that allow you to transfer substantial assets to a child that do not have the drawbacks of the UTMA.  Talk to the elder law/estate planning attorneys at The Karp Law Firm for details. 

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