There are two types of custodial accounts:
UGMA accounts allow only transfers of cash and securities whereas UTMA accounts allow transfers of other types of property and therefore can provide more flexibility. The type of account available depends on the state in which the account is established. Through these accounts, a donor establishes a custodial account for the benefit of the minor. The account transfers to the child outright once he or she reaches the age of majority. While the child is under age 18, the “kiddie tax” applies, and the income earned in the account may be taxed at the parents’ tax rate. Once the child reaches 18, he or she is taxed separately, which may provide tax benefits due to potentially lower tax rates.
The gift is irrevocable and the assets will pass to the child, whether or not they are used for education expenses. Note: Accounts in a child’s name can affect the child’s eligibility for financial aid.