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Q.What are the disadvantages of a UTMA Custodial Account?
A.First, any money in a custodial account for which you are the custodian will be counted as part of your taxable estate if you pass away before the child has reached the age of trust termination.
In addition, the income from a custodial account must be reported on the child's tax return and taxed at the child's rate, subject to the Kiddie Tax rules. The parent is responsible for filing an income tax return on behalf of the child. There is no special tax treatment for UTMA accounts. Children age 14 and older must sign their own tax returns.
Another disadvantage to the UTMA custodial account is the fact that the gift is irrevocable. Once you give it, you can't take it back because the original transfer is an irrevocable gift. However, nothing prevents the custodian from spending the money for the benefit of the child, so long as the expenses aren't "parental obligations" or otherwise benefit the custodian. Parental obligations are expenses a parent is normally expected to provide for a child (e.g. food, clothing, shelter, medical care). So if your child wants to a computer or to go to summer camp, it is usually acceptable to spend the child's money on such expenses.
Moreover, once the custodianship ends (at age 18 or 21), your child acquires sole and full control of the account and its assets.
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