One way to accomplish this is to use a custodial account established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). While the accounts offer certain tax advantages, earnings on these accounts may be subject to the "kiddie tax" if the child is younger than 14 years old. In essence, earnings on the account are taxable at the parent's highest marginal rate. If assets are invested in growth-oriented investments with minimal dividends or interest until the child turns 14, the impact of the "kiddie tax" can be minimized. In addition, UGMA/UTMA accounts are irrevocable gifts: the money belongs to the child, and control goes to him or her at the age of majority (which varies by state). And UTMA/UGMA accounts reduce your eligibility for financial aid. |