Wealth &
Protection Planning

Custodial 529 Accounts

Description

Custodial accounts are governed by laws adopted by each state.  These laws include the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA).  Every state has enacted the UGMA.  All but two states, South Carolina and Vermont, have adopted the UTMA. 

A Custodial 529 account is established when assets in an existing custodial account (UGMA/UTMA) are liquidated and invested in a 529 plan.  The account is administered by an adult, or custodian, until the beneficiary reaches the age of termination as determined by state law.  Once the child reaches the age of termination, he or she will have complete control of the assets.  At this time the assets should be moved out of the custodial account and into the child's name for qualified higher education expenses. 

Objective
  • To provide individuals with an account that allows for the transfer of ownership of securities or cash from a custodian to a minor.

Custodial 529 accounts may be appropriate for an investor who currently has a custodial account and wants to make an irrevocable gift, in the form of cash, to a minor for qualified higher education expenses.  

Product Features
  • Eligibility - Anyone who has a custodial account and would like to specify the funds to be used for higher education expenses may establish a custodial 529 account. A custodial 529 account is established when assets in an existing custodial account (UGMA/UTMA) are liquidated and invested in a 529 plan. This type of account allows any adult to make irrevocable gifts of cash to a specific beneficiary, and it must be used for qualified higher education expenses.
  • Contributions - Anyone can contribute, regardless of income. Contribution limits vary by plan, and contributions are irrevocable gifts. The $14,000 annual limit per donor, per beneficiary, should be considered. In addition, a special gifting provision applies to 529 plans: You may contribute $70,000 (single filers) or $140,000 (joint filers) in one year and prorate the contribution over five years for tax purposes, until the plan's maximum contribution limit is reached. Tax forms are required for accelerated gifting, so it is important to contact your tax professional.
  • Distributions - Distributions are federally tax-free if used for qualified higher education expenses. Unlike a custodial account, once the beneficiary reaches the age of termination, he or she must use the funds for qualified higher education expenses, as the custodian or any other contributor intended. If distributions are used for non-qualified expenses, the earnings portion may be subject to ordinary income tax plus a 10% penalty.
  • Tax Consideration - Liquidating a custodial account to invest the assets in a custodial 529 plan may trigger a sales charge and may generate tax-reportable gains or losses. Once invested in a custodial 529 plan, earnings in the plan accumulate tax free.
  • Financial Aid Considerations - Custodial 529 accounts are considered an asset of the account owner; 529 plans owned by the student or parent are considered parental assets, and this account generally has less impact on financial aid.

Contact a STRIVE Wealth Advisor for more information about custodial 529 accounts. 

If an account owner elects to treat a contribution as having been made over a five-year period and dies before the end of the five-year period, the portion of the contribution allocated to the remaining years in the five-year period (not including the year in which the account owner died) would be included in computing the account owner's gross estate for federal estate tax purposes. Account owners may be required to file a gift tax return in each of the five years. In addition, account owners may wish to consult their tax or estate-planning counsel to ensure that they obtain the tax consequences they desire.
STRIVE Wealth & Protection Planning LLC and its employees are not estate planners and cannot offer tax or legal advice.

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