Custodial Account vs. Joint Account: What You Should Consider
Uniform Transfers to Minors Act (UTMA) custodial accounts can make sense when saving on behalf of a minor, but there are some important things to know about the accounts.
Money put into a custodial account belongs to the beneficiary—it's called an irrevocable gift. At the age of majority, the custodian must transfer control to the beneficiary. At that point, the beneficiary has complete access to the money, and it can be used for anything. A joint account allows equal access to the funds at any point.
The gift tax may be a consideration
There's no limit to the amount of money that can be deposited into a custodial UTMA account, but gifts to an individual totaling $15,000 a year typically require a form to be completed for the IRS. It is also important to note that any amount in excess of $15,000 in a year must be counted toward the individual's lifetime gift-tax exclusion limits. In 2021, the federal lifetime limit is $11.7 million per individual.
A joint account does not constitute an irrevocable gift to the minor, as the account is established between joint tenants with rights of survivorship. Meaning that both parties have equal ownership of the funds deposited and that those funds are the surviving owner’s upon the death of a joint owner.
Please consult your tax advisor for information and advice on how to handle the gift implications of a custodial account.
Realized earnings are taxable
Earnings are subject to taxes as unearned income by the IRS. For children, unearned income above $2,200 is taxed at the rates used for estates and trusts. If interest and dividend income come to less than $11,000, the parent can include that income on their return.
Please consult your tax advisor for information and advice on the tax implications of a custodial account.
Little control over how the money is used
Once the assets are transferred, the beneficiary can use them for any purpose. In the state of NJ, the age of majority (when the beneficiary should take control of the account) is age 21.
A joint account allows equal access to the funds in the account past the age of majority.
Financial aid may be impacted
Financial aid for college can be adversely affected by custodial accounts. They are considered assets owned by the child. With joint accounts, only 50% of the balance in the jointly held account would count toward student assets.
No change in beneficiaries
You cannot change the beneficiary on a custodial account. For each UTMA account, one custodian and one beneficiary are allowed on the account. With joint accounts, the joint owner can be removed at any time as long as the individual is over the age of 18.
If you are interested in opening a custodial account, please click here.