Robert Brokamp
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Appearances Over Time
Podcast Appearances
Well, first of all, it's an irrevocable gift, can't take it back, and the money must be used for the kid's benefit.
You lose control when the kid becomes an adult, and this will depend on the state and the type of account you choose.
Generally, 18 to 21 can be as high as 25 in some circumstances, but at that age, the account owner, the kid, no longer a kid, can use the money for anything, not necessarily college or other purposes you intended.
And there also could be an impact on financial aid for college because custodial accounts are considered a student's asset and anything that is owned by the student will reduce financial aid eligibility more than anything that is owned by the parent or another adult.
Okay, so let's move on to our second option here, and that is the brokerage accounts owned by an adult.
And this is basically a way to get around the disadvantages of the custodial account.
So it's basically, you own the account, it's just in your name, but then when you think the kid is ready for the money, you gift the account to the kid, who hopefully then is a responsible adult.
One thing just to know is then the cost basis goes over as well.
Ideally, there's gains in there.
If it's at a loss, it's more complicated.
In that case, it's probably better for you as the adult to sell the investment, take the capital loss on your tax return, and then gift the cash.
Okay, so what are the benefits of doing it this way?
Well, again, complete control.
You maintain full ownership and control over the assets indefinitely, and you decide when to transfer the funds to the kid.
Again, unlimited investment choices.
You choose the account, and you can buy pretty much whatever you want.
A lower financial aid impact because it is owned by you.
If you're the parent, it will still affect financial aid, but not as much, but you may be a grandparent or some other well-meaning adult, and then it won't likely affect aid at all.
And then no contribution limits, but again, there could be gift tax