What are the tax implications for custodial funds for your kids?

Question

The grandparents setup custodial funds for each of the three kids - now worth about $10k each. Now I am the custodian of the funds. Do I have to pay taxes on dividends the kids funds earn? What if I sell stocks in their fund for a profit (leaving the cash in their account or buying another stock or mutual fund in there?) Do I have to pay capital gains?

Answer 1

I am presuming these are UTMA or UGMA accounts and not 529 college plans. If they are 529 accounts, they'd be in mutual funds, changes would be minimally allowed and would not create a taxable event.

Oh..and the first answer above is dead wrong.

For the other accounts, here's how it works:
1. Under age 14, first $750 is not taxed, the next $750 is taxed at 15% and the balance at the parent's highest marginal rate. (note we are talking about profits/capital gains.)
2. Over 14, taxes are paid at the child's rate.
3. Dividends are taxed as ordinary income and then you have short term and long term capital gains as in any other taxable investment.

Now....one other thing you need to know as custodian. You are required to follow Prudent man rules regarding how you invest the money. This means you cannot speculate. No options and no short term trading.

If your kids are young (not teens) it may make more sense to put the money into 529 college savings plans. While you will be limited to mutual funds and can only make allocation changes once a year, you will benefit from professional management AND the money is tax free to the beneficiary when used for qualifed education expenses.

In other words, by eliminating the tax issues, you may end up with more money.

Oh..and another perk to the 529 - the custodian maintains control of the funds (which need to be dispersed by age 30 but can be transferred to another family member). In most states kids gain control of UTMA or UGMA accounts at 18.

So...if your kid wants to buy a corvette instead of paying for college they can do that.

Answer 2

a million. Can he even declare them on his taxes if i'm the custodial determine? If that's the first 3 hundred and sixty 5 days, convinced... provided that your divorce decree states he can. in case you declare them in the first 3 hundred and sixty 5 days and he disputes it, the divorce decree will decrease back him up and also you'd be penalized for having claimed them. 2. How would the court docket change this if he would not bypass to an lawyer? He would not unavoidably ought to employ an lawyer to document a action. He can do it on his own see you later as he is going through all the right approaches. opportunities are intense, besides the undeniable fact that, that he will favor an lawyer and could discover that it prices more advantageous than it really is nicely worth in the destiny. Edit - If one tax season has already handed and he claimed them very last 3 hundred and sixty 5 days then he won't be able to legally declare them this 3 hundred and sixty 5 days. he might want to get the order amended. i does no longer difficulty about threats of him lowering baby help. He won't be able to legally attempt this on his own without being in contempt of the court docket. you would remind him of that next time he threatens it. If he mentions any of it lower back, tell him that you're not any more going to communicate it with him. tell him he desires to document the motions through the courts and enable them confirm. he's attempting to intimidate you into agreeing to enable him declare one baby without going to court docket. you do not ought to enable him. tell him to take it to court docket, and enable him do not ignore that you'll document him for nonpayment if he starts messing with baby help with no court docket order. opportunities are intense that he will decrease backpedal.