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HARVARD, YALE, OR YOUR LOCAL COMMUNITY COLLEGE

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tuition and books, right? But now, your child has decided that he or she would rather backpack across the Himalayas so you would rather use your $50,000 to buy a new car. The money is in your name, you’ve paid the taxes on it over the years, so therefore, you can buy a car or do whatever you want with that money.

INVESTING UNDER THE MINOR’S NAME

Now let’s assume that you want to put aside that $5000 for your son, who was just born. You decide that you are going to put that money under his name, so you don’t have to pay the taxes on it. There are two ways to do this. You can open a joint account with your son as the co- owner, but then you would be responsible for the taxes due for all dis- tributions. You want to avoid this, so you open a Uniform Transfers (Gifts) to Minors account, or an UTMA/UGMA. This type of account says the minor, in this case your son, is the owner of the account, but you are the custodian. All income taxes on the mutual fund are your son’s responsibility, which for most minors means that there will be no taxes paid because they usually don’t make enough to pay taxes.

As custodian, you have the right to make any changes to the investment (i.e., which mutual fund the money is invested, etc.). However, the money is considered, by law, to be a gift. Therefore, when your son turns 18 years old, the account becomes his. So, let’s say that the original $5000 has become $50,000 again. This time, when your son tells you that he is going to the Himalayas instead of college, he has a legal right to use that money as he wants. It is under his control, by law, not yours. One way partially around that is to make the account a joint account with you and your son upon his reaching the age of majority. While he would still be the taxpayer on the account, you would also be considered the legal owner of the assets. If the UTMA (or UGMA) account becomes his sole account when he turns 18 (age of majority varies by state), you have no legal right to that money, even though it was your money that has grown over the years.

You, as the parent and money donor, don’t have to be the custo- dian of the account, though. You may designate any adult to be the custodian of the account. However, the same rules apply; the money

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