Potential Advantages:
Aside from the requirement to hand over “control” of any remaining money to a child at 18 or 21, these accounts are extremely flexible. It’s basically up to the custodian (usually the parent) to determine how to invest the money and when to spend it on the child.Use of this account can help (but not guarantee) that $850 of investment income will go untaxed each year, with another $850 being taxed at the child’s tax bracket.
Potential Disadvantages:
The same tax benefit that makes custodial accounts attractive can also make them unattractive. After the first $1,700 in income potentially being sheltered from taxes, excess income is fully taxed at a parent’s marginal tax bracket. This would not occur in a Section 529 plan or a Coverdell ESA.Additionally, the account requires a custodian to hand over control of the assets to the child at anywhere from age 18 to 21, depending on the state. While parents with a good relationship with their child might be able to coerce those assets into being spent on college, a strained relationship may present a problem.
Lastly, a custodial account counts heavily against a student’s financial aid application, since it is ultimately considered an asset of the child.
