Using Custodial Accounts for Children and Teens

Paperwork everywhere. Seriously, I’ve got stacks just to open an account for a kid who can’t even spell “custodial.” UTMA and UGMA accounts sound simple, right? Not so fast. What no one tells you (and Schwab MoneyWise sure doesn’t spell out) is how these accounts can totally wreck a kid’s shot at college financial aid. And that’s just the start.

UTMA/UGMA Accounts: Benefits and Drawbacks

Custodial accounts? Honestly, they’re more like a trap door than a teaching tool. Assets in the kid’s name? FAFSA loves that—loves it so much it’ll slash your aid. Fidelity says the first $1,350 of annual earnings might avoid federal tax, but go over that and the IRS wants more, sometimes at the parents’ rate. You can shove all sorts of stuff in there—stocks, mutual funds, savings bonds—not like 529s, which are a little less annoying if you plan to dodge the aid minefield. Oh, and gifts are irrevocable. No take-backs when your teen decides college isn’t for them and they’d rather open a hot dog stand.

And the age thing? The state decides when your kid gets control. I watched my niece inherit her UGMA at 18 and spend it on a Jeep and sneakers. You can’t stop them. UGMA is for securities, UTMA can hold basically anything—even real estate, so, yeah, your toddler could own a rental before they know how to tie their shoes.

When to Use a Custodial Account

I don’t shun custodial accounts, I just use them carefully. Birthday checks from grandma? Fine, toss them in a UTMA. But I never use these for major stuff like college funds. Assets in these accounts count hard against financial aid. Schwab MoneyWise’s numbers? Brutal. I set reminders: senior year, no surprise windfalls showing up on the FAFSA.

Other parents act like custodial accounts mean you’re a financial wizard. I say, keep it simple: let kids learn investing, don’t try to fund college through this. If your kid mows lawns or bags groceries, match their earnings in a custodial account—let them see how saving works, but don’t dump the whole farm in there.

If you’re eyeing private high school, sometimes these accounts work for tuition. But it’s not a piggy bank you can raid. I keep my own assets in my name or in a 529 if I’m even half-thinking about college. Custodial accounts? Good for small gifts, early access, not for the long haul.

Trusts and Advanced Gifting Methods

Every financial advisor (yeah, that includes me) will shout about estate taxes eating your lunch while you forget your login for half your accounts. Trusts, donor-advised funds—they make my accountant groan, but they really do some tax magic if you can stand the hassle.

Irrevocable Trusts for Gift Giving

Someone once asked if irrevocable trusts are just “hiding money.” Not exactly. It’s more like firing yourself as boss of your own cash, but with perks. Assets in an irrevocable trust leave your taxable estate—IRS 2025 tables say that could mean six-figure savings if you’re loaded. You can move property or stocks in, but don’t expect to yank them back—no do-overs.

Setup fees? Painful. Maintenance? Like owning a classic car—expensive and only fun if you hire pros who know about generation-skipping trusts or weird Delaware rules (seriously, Delaware loves complicated stuff). If you want grandkids to see a dime, and not just lawyers, this is how families keep money rolling into the next generation.

Establishing a Donor-Advised Fund

I never remember what I donated last year—donor-advised funds fix that. Think of it like a charitable IRA. I give stock, art, cash, whatever; the sponsoring charity sells it, I get an immediate tax deduction (up to IRS caps), and I recommend grants to nonprofits whenever I finally get around to it. Fidelity and Schwab make it look good—better than my bank’s app, honestly.

You don’t get the money back, but you get flexibility and some capital gains savings. Clients use these to teach family about giving, set up legacy projects, whatever. No pressure to pick charities right away. Decisions can drag for years. One Thanksgiving, my uncle argued a dog rescue deserved more than cancer research—at least it was a productive fight.