We recently posted a blog article on the choice between gifting to a 529 Plan or a Minor’s Gifting Trust. There is a third option – transferring assets to a custodial account for the benefit of a minor. In New Jersey and New York, these gifts would be made under the Uniform Transfers to Minors Act (“UTMA”).

A donor can create an UTMA account for the benefit of a minor beneficiary, and can gift annual exclusion gifts (or larger amounts which would then utilize a portion of the donor’s lifetime applicable exclusion amount). The account is owned by the minor and as a result the minor is the taxpayer. While the beneficiary is a minor, the designated custodian is in control of the account and makes all investment and distribution decisions. Unlike a 529 Plan, the growth inside the UTMA account is subject to income tax and distributions are not limited to higher education. Interestingly, if the custodian has a legal obligation to support the beneficiary, and the custodian dies while the beneficiary is a minor, the custodial account will be included in the custodian’s taxable estate.