custodial accounts

Dear Liz: I opened Uniform Transfers to Minors Act savings accounts for my two boys (now 7 and 10) when they were newborns. I chose not to go with the 529 college savings accounts because I didn’t like the restriction that the money had to be used for education. It has always been my intention to use these funds for college, but if they choose not to go to college, then it could be used to help them purchase their first homes, for example.

I’ve been squirreling away a couple hundred dollars each month in each account, but I read a few of your previous pieces and think maybe the UTMA accounts were not the best vehicle for this. Could they one day just demand the money and do with it whatever they want?

Answer: The short answer is yes. In most states, the money will become theirs at age 21 to spend however they want, although a few states let them have it at 18.

The other big disadvantage to custodial accounts such as UTMA and UGMA (Uniform Gifts to Minors Act) accounts is that they’re counted as the child’s asset in financial aid calculations. That can substantially reduce the amount of aid they get.

But even more important than the financial details is your attitude. You need to give up this notion that not going to college is a reasonable option for your kids. In the 21st century, some kind of post-secondary education is all but a necessity for a person to remain in the middle class, labor economists tell us. Your sons don’t have to study at a four-year school, but they are likely to need at least some vocational training beyond high school.

If you want to reduce the effect of these accounts on any future financial aid packages, you have a couple of options. One is to spend the money before they get to college, although that’s probably not the route you’ll want to take, given how much money you’ve already saved. If the accounts were smaller, you might just use them to buy a computer, pay for summer camp or cover the cost of tutoring. Such expenditures are allowed as long as the money is spent for the benefit of the child and doesn’t pay for expenses that are your obligation as a parent (food, shelter, clothing, medical care).

Another option is to liquidate the accounts and invest the cash in 529 plans. This would dramatically reduce the money’s effect on financial aid calculations, since it would be considered your asset rather than your child’s. The money could be withdrawn tax free to pay for qualified higher education expenses. If it’s not used for higher education, the contribution portion of the withdrawal won’t be taxed as income, but any earnings will be, plus there will be a 10% federal tax penalty on those earnings.

If you decide to transfer the money, the 529 account should be titled the same way as your UTMA accounts, said Mark Kantrowitz, publisher of the college planning website FinAid. Ownership of the account shifts to the child when he reaches the age the UTMA account would have terminated. That gives him control of the money if it’s not spent on education, but he would have had that anyway. You can read more about the details at http://www.finaid.org/savings/ugma.phtml.