Grandparent Having a Custodial Account for Your Child?

It depends on how large she intends the account to be and what she intends to save it for - is she thinking of it as a high school graduation gift or college? Are we talking a few hundred dollars or thousands?

UGMA or UTMA accounts are considered the assets of the child so if the account has assets in it when you file the FAFSA in the fall of senior year, 20% of the account balance will be counted in the EFC (expected family contribution). A solution to that would be to spend down the account before filing the FAFSA, perhaps buying a computer, a car, paying for a vacation or some other large expense.

A regular 529 that the grandparent holds is considered an asset of the grandparent and is therefore not reportable on the FAFSA. However, any money distributed from that account is considered untaxed income of the student in the year it is distributed, so while that might be a great idea for Freshman year, if 529 assets are actually used to pay tuition that year, it will severely increase the student's EFC for the next year, and so on.

A custodial 529 is treated like a parent asset, which is better than having distributions count as income or have the money count as a student asset as it would in an UGMA or UTMA.

If the goal is college savings, a custodial 529 might make the most sense. But if the goal is to give her a little spending money to fund some of those more extravagant things that teens like to do (a laptop for college, travel abroad, attend specialty summer camps, buy a used car) then an UGMA account that is spent down before the FAFSA application is completed might be the right option.

My husband is an investment advisor.
He doesn't recommend those types of accounts because in MOST cases the assets go to the child after they reach a certain age, and then of course the child may or may not spend the money as it was intended, which is usually for college.
He recommends parents (or grandparents) simply set up a separate account in their own name/s, where deposits and investments can be made for the child's benefit, but without the child's name attached.

Have Grandma open a 529 in her name for your child. It is for college. Opened one for each of my granchildren. Put a set amount in monthly.

Yep my mom had an account like this for our daughter once our daughter was 5 years old and then my MIL also opened one once our daughter graduated from High school.

These accounts were great. Pour daughter loved saving money. Even in college, she always saved at least a $1000. per school year.

Each time our daughter was given money for birthdays holidays or she earned money.. she wanted to add it to the savings account.

As she got older, her "wants" became larger, so we would ask her, do you want to take it out of your savings? Sometimes she said yes, other times she said no..

She still has both accounts, but now they are hers. One was through my moms Credit Union.. The other was a neighborhood bank, that our child now has as her checking account.

The accounts did not have any affect on her qualifying for grants, scholarships or loans for her College.

I second patty's answer. Go with a 529 college account.

My mom and I set one up for all my kids several years ago...and it has been wonderful!

WOW.

You are way way over thinking this. My grandmother had a custodial account for each of us. The accounts were in her name (as custodian) and turned over to us directly upon our 21st birthdays. I used mine to pay for my graduate work, as did one of my sisters.

My parents have custodial accounts for all of the grandchildren. This is THEIR gift to the children and I have stayed out of it entirely. Honestly, I don't know how much is even in there, but I know that they put $$ in for each birthday, holiday and "special event". The children will have access to that money if/when they need it.

Unless your mother is going to be contributing SUBSTANTIAL money, it will not impact college financial aid.

I think you may be confusing a "trust" account with a "custodial account". If you aren't sure, then please check with a financial adviser.

**I would NOT recommend a 529 for one simple reason... that will impact your child's college aid AND you are assuming that your child will need the $$ for college. What if she gets scholarships and aid and wants to use the $$ as a down payment on a house? She won't be able to.**

I work for a university and have dealt with may grandparents. I don't know what kind of account it is. I don't think it will effect their FA since it's in the grandparents name. Once she's in school your mom would just write checks from that account to the school. I am sure you want a specail account so that it's one that earns intrest that you would probably need to talk to a CPA. I think it's a great idea though.

So many of the tax laws on these accounts are changing that it would be a good idea to talk to a financial planner and find out the best way to set aside money for the grandchild's future. That is very generous of the grandmother to want to set up an account for her!

Wow! Yes, it's good for a grandparent to have a custodial account for their grandchild. I can't even imagine a reason for them not having one. Be thankful that grandma is wanting to invest in your child's future.

As to what kind of an account, that's up to Grandma unless she is asking for your input. This is her money to do with as she sees fit. Why would she give control of the money over to you? It's a gift to your daughter, her granddaughter.

If she just funds the money to you, you can spend it however you want. You might decide that your daughter needs a class at the science museum and use that money. It's Grandma's money and she wants to be the one who helps your daughter, her granddaughter spend the money.

Geez! If I were the Grandma, I'd maybe rethink this issue, see it as too complicated and back out.

I just know enough not to put it in their name!