Question

Iggy’s is 15 years old and lives in New Hampshire. She is a student, does not work, and plans to enter college once she graduates high school when she is 18 years old. Her grandparents want to be able to help her pay for college. They currently own shares of stock that could be used to pay for her education. What is the best option tax wise for them to make this gift to Iggy?

• A :

  Make a transfer of the stock under the UGMA, which would not require taxes to be paid by either Iggy or her grandmother.

• B :

  Make the gift to Iggy as soon as possible to save paying taxes on the gain of the stock.

• C :

  Her grandparents cannot make a gift to Iggy because she is only 15 years old.

• D :

  Open a custodial IRA account and transfer the shares of stock to the account.

Answer 1

The Uniform Gifts to Minors Act (UGMA) allows individuals to give or transfer assets to underage beneficiaries—traditionally, parents and their children, respectively. The amount is free of gift tax, up to a certain amount.  Contributions to UGMA accounts are made with after-tax dollars—the donor doesn't receive an income tax deduction for making them. However, up to $15,000 per individual ($30,000 for a married couple) can be contributed free of gift tax.

A Custodial IRA is an Individual Retirement Account that a custodian (typically a parent) holds for a minor with an earned income. Once the Custodial IRA is open, all assets are managed by the custodian until the child reaches age 18 (or 21 in some states). While not tax-deferred, as are IRAs, custodial accounts do have some tax advantages. The IRS considers the minor child the owner of the account, so the earnings in it are taxed at the child's tax rate. Every child under 19 years old—24 for full-time students—who files as part of their parents’ tax return is allowed a certain amount of “unearned income” at a reduced tax rate.

In my opinion, Option A : Make a transfer of the stock under the UGMA, which would not require taxes to be paid by either Iggy or her grandmother is the correct answer