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 tax-free withdrawals for K-12 tuition up to $10,000 annually, and provides better financial aid treatment (5.64% assessment rate vs. 20% for UGMA). The uncle can serve as account owner for either type. 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, as long as it's not a basic parental obligation (food, clothing, shelter).

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 dependents under age 19 (or under age 24 if a full-time student). The first $2,700 is taxed at the child's lower rate. A ($1,300) was an older threshold and is not current. 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.

Covered call writing is generally permitted in UGMA/UTMA accounts because it reduces risk (the custodian owns the underlying stock and is obligated to sell at the strike price if assigned). Covered calls generate premium income and are considered a conservative income strategy suitable for custodial accounts. B is incorrect because buying options (puts or calls) is prohibited in UGMA/UTMA accounts. Options do not provide evidence of ownership and are considered too speculative for minors. C is incorrect because margin trading is prohibited in custodial accounts since minors cannot legally sign margin agreements and margin is considered too speculative. D is incorrect because short selling is prohibited in custodial accounts as it involves unlimited risk 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 taxed at the child's tax rate. Since the account generated $4,200 in dividends and interest, the first $2,700 portion receives preferential tax treatment at the child's lower 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.