Parents set up custodial accounts for children for various reasons, some legitimate and some not. Aunt Gertrude gives $10,000 to little Johnny: set up a custodial account to hold the money. Parents want a tax shelter for little Stephanie’s college savings fund: set up a custodial account to invest the dough until college time. Single Mom wants to hide some cash so she can qualify for financial aid and go back to school: move the money into a child’s custodial account and take it back later. You get the idea. The problem: many parents fail to recognize that custodial accounts have significant legal and tax implications.
Here are the five most important things to understand.