My parents have been buying stocks for my children every year and holding them in a custodial account for each child. It seems my children will gain control of these accounts at age 21. I have a few questions:
– Do my children owe any gift taxes on these when they turn 21? (The value in each account would be over $19K.)
– Do my children inherit these as a “step up basis” or when they sell the stocks, must they pay taxes on the capital gains from the original purchase price?
– What happens if my parent listed on the account passes away before my child turns 21? Is the account inherited by my other parent (the surviving spouse) or by my child?
– Is there a better way for my parents to transfer the stocks to my children or is a custodial account the best option?
I appreciate your advice!
Children gaining control of custodial accounts
byu/EnnaEnerge inpersonalfinance
Posted by EnnaEnerge
2 Comments
1. No; the gift was made when the cash or shares were deposited into the UTMAs. The kids actually *own* the UTMAs and everything in them; they just don’t have *control* yet.
2. They will owe taxes on any dividends and capital gains in the account, just like any other account owner.
3. The next custodian in line depends on how the account is set up. They *probably* named each other, and then you, but you’d have to ask to be sure.
4. Inheritance would be better because the heirs get a free step up in basis. But assuming your parents don’t want to wait until they die to give out the goodies, this is as good a way as any.
The most important thing with an UTMA is that your kids understand how to manage this money when they get access to it, which is *your* responsibility as their parent. Mine utterly failed to teach me anything, and I blew the entire account on bullshit in under a year. Don’t be my parents.
> Do my children owe any gift taxes on these when they turn 21? (The value in each account would be over $19K
No. It’s already their money (and the giftee doesn’t pay gift tax anyway)
> Do my children inherit these as a “step up basis” or when they sell the stocks, must they pay taxes on the capital gains from the original purchase price?
There is no inheriting. The children have always owned the assets.
> What happens if my parent listed on the account passes away before my child turns 21? Is the account inherited by my other parent (the surviving spouse) or by my child?
They’d need to assign a new custodian but your children have always owned the assets.
> Is there a better way for my parents to transfer the stocks to my children or is a custodial account the best option?
Bequest upon death but that creates some perverse incentives