Judging by my mail, custodial accounts for kids — which usually take the form of UGMA (Uniform Gifts to Minors) or UTMA (Uniform Transfers to Minors) accounts — are a source of concern and confusion among parents. This week, I'll tackle some typical questions.
Question: I am divorced, and my ex-wife has custody of our daughter. What's the best way to save money for my child without having her mother spend it on other things?
Answer: A custodial account would be the most convenient arrangement, with your daughter as beneficiary and you — or someone else other than your former wife — as custodian.BR>
All the money in the account would have to be used for your daughter's benefit. As custodian, you would have discretion over how it is spent until your daughter reaches the legal age at which you must turn the money over to her — see the question below.
Another alternative: If you want to save specifically for college, you could set up a Coverdell education savings account or a state 529 plan, again with your daughter as beneficiary.
Question: I would like to set up a dollar-for-dollar savings plan for my 16-year-old son. But I want to ensure that he doesn't withdraw the money arbitrarily after I provide my match. What can I do to prevent this?
Answer: Once again, you could set up a UGMA or UTMA account with yourself as custodian until your son reaches the legal age in your state.
In a few states, kids get control of their money when they turn 18. But most states don't make you turn over the assets until your child reaches 21, and a few let you stipulate an age up to 25. That guarantees your son could at least finish college before getting access to the money on his own.
Question: I have $18,000 in a UTMA account for my teenager, and I just learned that this will reduce his chances of receiving financial aid for college. How can I spend the money to reduce the account assets?
Answer: There's no official list of approved expenditures. The law simply requires that the money be used for your son's benefit. Under that broad rule, you could send him to summer camp, pay for guitar lessons — or an SAT prep course.
What you cannot do is spend the money on yourself, or transfer it into an account in your name.
Have a question about kids and finances for Dr. Tightwad? Write to Dr. T at 1729 H St., N.W., Washington DC 20006. Or send the good doctor an e-mail message (and any other questions for this column) to jbodnar@kiplinger.com.