A Custodial Account for your Grandchild is Not Necessarily the Best Choice

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Estate Planning Attorney

A client of mine professes to want to establish a college savings plan for her new grandson. His father however insists that a custodial account is a bad idea, but she couldn’t explain why the father feels this way.

Here’s the reason. Custodial accounts, straightforward to set up, have potential pitfalls as college savings plans, and for the grandparent. Once you leave an asset to a grandson in a custodial account under the New Jersey Uniform Gifts to Minors Act or the Uniform Transfer to Minors Act, the asset is no longer yours. You cannot access it if you need the money. However, if you are still the account custodian when you pass away, the funds will be included in your gross estate for estate tax purposes.

If your grandson applies for financial aid in the future, the account will be considered his and could count against him. Also, he will get the funds at age 21, no strings attached. If he’s mature at that point or the amount is small, no problem. But if he is not, especially if the amount is large, he might squander it or even use it as an excuse not to attend college, or to avoid work.

Another issue to consider: the account is subject to a federal “kiddie tax,” pegged to the parent’s income tax rate and the interest income earned on the account will be taxed and applied to the parents as unearned income over $2100.

If you plan to contribute a significant sum to a grandchild’s college savings, I suggest exploring other vehicles, such as a trust or a 529 plan.

To discuss your NJ Estate Planning matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.