Minor children

As the season turns and it starts to feel like Fall, many parents are either paying college tuition bills or worrying about paying them. Many of my clients have asked me how 529 college savings plans or custodial accounts are counted when colleges consider financial aid.

Here are the basic rules and a few strategic ways to use them.

Student’s assets are counted more heavily than parents’ assets by colleges. When a school analyzes family finances using the Free Application for Federal Student Aid (FAFSA), which most schools do, they count parental assets differently than those owned by students when they calculate how much a family should contribute towards college costs. When the schools calculate the Expected Family Contribution (EFC), they expect parents to contribute no more than 5.64% of their assets. But a student is expected to contribute 20% of their assets. That means that if a student is considered the owner of an asset, a school will expect that student to use more of it to pay for school than they would expect from a parent that owns the same amount of assets. So, any asset a student owns will reduce available financial aid more than any asset a parent owns.

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Custodial accounts are an easy way to hold money for a minor child’s benefit. They have many advantages. They’re free-it’s easy to open up a custodial account at any bank or financial services company. (You’ll know if an account is custodial in California because it will say “CUTMA” on the statement, which stands for California Uniform Transfers to Minors Act.)

They’re simple-a custodial account can hold cash, or other assets, for the benefit of a minor until a certain age (in California, until age 21 if the account is established during life; 25 if created by a Will or a trust after a death). They work as intended – when the property is transferred to the CUTMA account, the child becomes the legal owner, but has no control over the money until the account ends, when they are old enough, presumably, to properly manage it. Until that time, the account’s custodian can use the money for that child’s benefit.

But what do you do if they get too big? I’ve had more than one client come into my office terrified because their children are going to inherit hundreds of thousands of dollars way before their parents think that would be a good idea. Some of you are, no doubt, rolling your eyes in mock horror, but this can be a source of great stress for parents. Imagine, for example, that a well-meaning grandparent bought Pretend Co. stock when it was at $7/share (in 2002) and gave 2000 shares of stock to a custodial account for your child. Fourteen years later, that stock is now worth $104/share and worth $208,000! And your adorable child is now a goofy 17 year old, interested more in texting, dating, and driving than careful investing.

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