What is UGMA/UTMA?

The 529 plan is most appropriate for Jennifer's situation because it offers superior flexibility: she can change beneficiaries if her daughter doesn't attend college (unlike UGMA, which is irrevocable), allows federally tax-free withdrawals for K-12 expenses up to $20,000 per beneficiary per year (2026), and provides better financial aid treatment (5.64% assessment rate vs. 20% for UGMA). The uncle could serve as UGMA custodian, but Jennifer keeps the most control by owning the 529 plan herself. A is incorrect because UGMA gifts are irrevocable and the beneficiary cannot be changed. Once the funds are gifted to the child, they belong to the child permanently. C is incorrect because UGMA accounts legally transfer to the minor at age of majority (typically 18), at which point the custodian no longer controls the funds and the young adult can use them for any purpose. D is incorrect because UGMA funds can be used for any expense that benefits the minor, including private school, and the uniform acts let the custodian spend for the minor's benefit without regard to anyone's duty to support the minor (although the IRS treats custodial income used to meet a parent's support obligation as taxable to that parent).

For tax years 2025-2026, the kiddie tax threshold is $2,700 of unearned income. Unearned income (dividends, interest, capital gains) over $2,700 is taxed at the parent's marginal tax rate. This applies to any child under 18, and to a child under 19 (under 24 if a full-time student) whose earned income does not exceed half of their own support. Below the threshold, the first $1,350 is offset by the child's standard deduction and the next $1,350 is taxed at the child's rate (2026 figures). A ($1,300) is not the threshold; the 2026 ladder uses two $1,350 tiers that sum to $2,700. B ($2,000) is the annual contribution limit for Coverdell ESAs, not the kiddie tax threshold. D ($4,000) is not a kiddie tax threshold. Note that these thresholds are indexed for inflation and change periodically.

Writing covered calls against stock the account already owns is the options strategy firms most commonly allow in custodial accounts: the custodian holds the shares to deliver if assigned, and the premium adds income. The uniform act itself names no permitted or banned strategy; it holds the custodian to the care a prudent person would observe in dealing with the property of another, which is why firms commonly restrict margin, short sales and speculative options in these accounts. B is incorrect because buying calls on an unrelated speculative stock puts the whole premium at risk on a bet, the kind of speculative options trading firms commonly bar. C is incorrect because borrowing on margin adds borrowed money and its risk to a minor's property, and firms commonly prohibit margin in custodial accounts. D is incorrect because a short sale exposes the account to unlimited loss and requires a margin account.

The custodian does not retain control after the minor reaches the age of majority. At that point (age 18 for UGMA in most states, or up to age 25 for UTMA depending on state law), the account legally transfers to the now-adult child, who has full control and can use the funds for any purpose. The custodian's authority terminates. A is accurate: UGMA/UTMA gifts are irrevocable. Unlike 529 plans where the account owner can change beneficiaries, custodial account gifts permanently belong to the named minor and cannot be redirected. B is accurate: UTMA permits a broader range of assets including real estate, artwork, and other property, while UGMA is limited to financial securities. C is accurate: this is a major disadvantage of UGMA/UTMA for financial aid purposes since student-owned assets are assessed at a much higher rate (20%) than parent-owned 529 plans (5.64%).

Statements 2, 3, and 4 are accurate. Statement 1 is false: The kiddie tax applies only to unearned income (dividends, interest, capital gains). The child's $3,000 in W-2 wages from employment is earned income and will be taxed at the child's own tax rate (likely 10% or even 0% after standard deduction), not the parent's 32% rate. This is a common misconception. Statement 2 is true: The first $2,700 of unearned income (2025-2026 threshold) is not subject to the kiddie tax. Net unearned income is measured above two $1,350 tiers, so only the excess over $2,700 is taxed at the parent's rate. Statement 3 is true: Unearned income exceeding the $2,700 threshold is subject to the kiddie tax and taxed at the parent's marginal rate. In this case, $4,200 - $2,700 = $1,500 will be taxed at the parent's 32% rate rather than the child's lower rate. Statement 4 is true: The child must file a tax return using their own Social Security number. UGMA/UTMA accounts use the minor's SSN, not the custodian's or parent's SSN. The minor is responsible for reporting and paying taxes on account income.