How to set up a custodial account for your grandchild

Nov 15, 2011, 8:59 a.m.

Gifting money to your grandchildren is one of the ultimate ways to assist them in getting a head start in life. The prime issue in doing so, however, lies in the potential misuse of the money prior to the child reaching maturity. If you're concerned your grandchild might blow $5,000 on video games, you can gift your grandchildren yet remain in full control of the money by setting up a custodial account.

A custodial account is an account set up for your grandchild that you maintain full control over until your grandchild reaches a designated age. The account can be a bank account, brokerage account or even in the form of a trust fund. There are tax benefits for gifting your grandchildren rather than your children directly. You can gift your grandchildren up to $12,000 per year and $24,000 per year tax free as a married couple. These gifts are not counted as taxable income to your grandchild and do not count toward the lifetime $1 million gift tax exemption limit. Be sure to consult your tax adviser before creating a custodial account, as changes to the tax code are rampant.

Any financial services company or bank can assist you with the mechanics of setting up a custodial account, though you may find using your current providers for the custodial account most sensible.

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