UGMA- UNIFORM GIFTS TO MINORS ACT: These are custodial accounts that parents can establish for a minor. The account is managed by a custodian who should not be parent- otherwise the income will be taxed to parent. Investments are usually restricted by state to life insurance, cash and certificates of deposit. Gifts may be given to the trust under the $10,000 per person per year exclusion- even to the use of life insurance.

The major reason that parents do not utilize this form more often is the fact that the child has the right to the assets at the age of majority (varies from state to state from age 18 to 21- Delaware and New York allow the custodianship to last to age 21). If the child has not turned out "properly", too bad. It is their money to do with as they desire.

Another drawback is that unearned income over $1,300 per year is still subject to the Kiddie Tax Rules.

UTMA- Uniform Transfer to Minors Act: Essentially the same as above except that the UTMA allows a greater use of various investments- mutual funds, partnerships, bonds, stocks, etc. The UTMA may receive assets from a testamentary transfer and get a full step up in basis upon death. It is also subject to the Kiddie Tax Rules.

SPECIAL NOTE: In cases where the funds are actually turned over to the child, the actually savings throughout the years could backfire when, under financial aid formulas, the student may be required to contribute 35% of savings while the parents percentage as required by the colleges might be only 6%. The effects on income are the same- colleges look to reach 70% of a student's income while only 47% of the parents income. So all the machinations of trying to make that extra bit of savings by using all the special rules of UTMA's, etc. and transferring assets into the lower tax bracket of the child may be lost in the first year when the college take a much larger large amount of a students assets. In essence therefore, UGMA's and UTMA's can end up COSTING the parent extra money.

Of course, if the parent/student will pay for all costs- there being no aid being sought- the above strategies are still valid where applicable. Only if a truly irrevocable trust is used might there be avoidance of this problem.