Tax benefit of custodial brokerage account

Question

If my understanding is correct, then the tax benefits of a custodial brokerage account are (in 2023):

1. Sheltering of up to $2200 of unearned income / year
2. Avoid gift taxes on gifts up to $15,000 / year

However, it seems like these amount to very little benefit in practice:

For (1) only the first $1100 is untaxed, and the next $1100 is taxed at the child's rate (10-12%). Even if the entire $2200 were untaxed, we are only talking about saving maybe $800 a year. Additionally, to claim $2200 in unearned income, there is some management work needed in order to realize the income.

For (2), unless you have a large estate (~$12 million), your child won't ever actually pay any gift tax.

Lastly, a custodial brokerage account is attributed to your child by FAFSA, which could reduce aid by ~ 20% of the value of the brokerage account -- which could eclipse the very minor tax benefits offered in the first place.

All together, it seems like there isn't really any financial benefit from these accounts -- or am I missing something?

Answer 1

The UGMA/UTMA accounts are not to provide tax benefit to the parents, they're to provide funds and protection to the children. The assets in these accounts do not belong to you, they belong to the child. Which means that as the custodian you have fiduciary duty to the child and should only use the funds to the child's benefit. Downpayment on a house where the child will live may or may not be a valid use case, but using child's money for the downpayment may also create child's ownership in the property.

In addition, adding funds to these accounts creates a gift to the child, which may trigger gift tax requirements (filing form 709, reducing your lifetime exemption, etc).

You should talk to a lawyer and a tax advisor.