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Is Custodial Account Reportable as My Income?
I want to set up a savings account for my grandson who is eight months old. I don't want his parents to have access, so I know I will have to be the custodian. Do I have to claim this account as income?
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 If you set up an account for your grandson under your state's Uniform Transfer to Minors Act (in Vermont, the Uniform Gifts to Minors Act), naming yourself as custodian, any funds you deposit to the account become an irrevocable gift to your grandson.
Because the funds in the account would belong to your grandson, even though you control the account, you'd have to provide your grandson's social security number in order to open the account. Annual tax statements on the interest earned on the account would be issued under your grandson's social security number. At some point, your grandson's parents will have to know about the account, because they would bear the responsibility for reporting that interest income either on their tax return or on a separate return for the child, so if you're OK that they would learn of the account, that is probably the route to take.
There is an alternative, if it fits your plans. You could set up an account in your own name, with interest taxable to you, and designate it to be payable to your grandson upon your death. The funds in such an account remain yours, and you can revoke the designation of your grandson at will.
You may also be able to set up a college fund, another form of irrevocable gift, under a state tuition savings plan, sometimes referred to as a "529 Plan" for the applicable section of the Internal Revenue Code, that can provide more flexible investment options, favorable tax treatment, and personal control during your lifetime. Some 529 plans are pre-paid tuition plans that can provide protection from inflation in college costs. Contact a financial planner before committing to any course of action so that you'll learn all of the advantages and disadvantages of each approach.
Published on BankingQuestions.com 7/31/08
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