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Lifestyle Q & A Forum

Should a child's savings be in the baby's name or in the parent's name?

by
Dee Lee, CFP, MBA Certified Financial Planner & Author Harvard Financial Educators



Question:
We have a newborn and would like to put money away for her education. I have heard conflicting answers, should it be in the parent's name or the child's name?
Answer:
It depends! In most states a custodial account for a minor child is held in an UTMA account (Uniform Transfers to Minors Act) with an adult as the custodian until the child reaches the age of majority for that state, which is usually 21, but could be 18 depending on the state. What that means legally is that the money becomes the kid's at 21, but a parent can spend down the account for the child's welfare such as paying for a college education.

For some families, having money in the child's name will affect college aid. The College Board estimates that 45 percent of all undergraduates are eligible for some sort of aid, mostly in the form of loans, work-study programs and grants. When looking at resources the FAF takes into account the first 35 percent of the assets held in the child's name and only 6-7 percent of the parent's assets. With this current congressional session, there may be some changes coming, so stay tuned.

For the majority of families, savings should be put in the child's name. With 50 percent of marriages ending in divorce, you'll know this money remains for college funding and does not become part of the martial assets. And there are tax advantages to keeping it in the child's name as well: over the age of 14, the earnings are taxed at the child's tax bracket.