A minor generally lacks the ability to manage property. You could create a formal trust, but this step may be costly. A practical alternative may be a custodial account under the Uniform Gifts to Minors Act (UGMA), or the Uniform Transfers to Minors Act (UTMA), which has replaced the UGMA in practically every state.
Custodial accounts set up in a bank, mutual fund, or brokerage firm can achieve income splitting; the tax consequences discussed below generally apply to such accounts. Trust accounts that are considered revocable under state law are ineffective in splitting income.
Although custodial accounts may be opened anywhere in the United States, the rules governing the accounts may vary from state to state. The differences between the laws of the states generally do not affect federal tax consequences.
There are limitations placed on the custodian. Proceeds from the sale of an investment or income from an investment may not be used to buy additional securities on margin. While a custodian should prudently seek reasonable income and capital preservation, he or she generally is not liable for losses unless they result from bad faith, intentional wrongdoing, or gross negligence.
When the minor reaches majority age (depending on state law), property in the custodial account is turned over to him or her. No formal accounting is required. The child, now an adult, may sign a simple release freeing the custodian from any liability. But on reaching ...