Special Types of Accounts

B is correct. UTMA (Uniform Transfers to Minors Act) permits a broader range of assets including cash, securities, real estate, and other property, while UGMA (Uniform Gifts to Minors Act) is limited to cash and securities only. This makes UTMA more flexible for holding various types of gifted property.

A (margin trading) is incorrect because neither UGMA nor UTMA accounts permit margin trading, as it is considered too speculative for minors. C (age 18 vs 25) is incorrect because while UGMA typically transfers at the state's age of majority (often 18), UTMA's transfer age is state-determined and can vary, not always 25. D (court approval) is incorrect because neither UGMA nor UTMA requires court appointment for custodians.

C is correct. Section 529 plans have no federal income limits for contributors (unlike Coverdell ESAs), and contribution limits are state-determined, often ranging from $300,000 to $500,000 or more per beneficiary. This makes 529 plans accessible to high-income earners and allows for substantial education savings.

A ($2,000 limit) is incorrect because that is the annual contribution limit for Coverdell ESAs, not 529 plans. B (income requirements) is incorrect because 529 plans have no income limits, while Coverdell ESAs do have phase-outs ($95,000-$110,000 for single filers). D (contributions stop at 18) is incorrect because 529 plans have no age limits for contributions or use.

D is correct. The kiddie tax rules create a tiered system for taxing a minor's unearned income: the first $1,350 is tax-free (standard deduction), the next $1,350 is taxed at the child's rate, and any unearned income above $2,700 is taxed at the parent's marginal rate. This applies until age 19 (or 24 if a full-time student).

A (all at parent's rate) is incorrect because it ignores the $2,700 threshold below which more favorable treatment applies. B ($5,000 tax-free) is incorrect because the tax-free amount is only $1,350, not $5,000. C (all at child's rate) is incorrect because amounts above $2,700 are taxed at the parent's higher marginal rate, not the child's rate.

B is correct. Writing covered calls is generally permitted in UTMA accounts because the strategy reduces risk rather than increasing speculation. The account already owns the underlying stock, so the risk is limited. This conservative options strategy is considered appropriate for custodial accounts.

A (margin trading) is incorrect because custodial accounts must be cash accounts only; margin trading is prohibited as too speculative for minors. C (short selling) is incorrect because it involves unlimited risk and is prohibited in custodial accounts. D (naked put options) is incorrect because writing naked options creates substantial risk and is not permitted in custodial accounts.

C is correct. Under the 5-year gift tax election (superfunding), a married couple can contribute up to $190,000 in 2025 ($19,000 annual gift exclusion × 5 years × 2 spouses = $190,000) to a 529 plan per beneficiary. This amount is treated as if it were made ratably over five years for gift tax purposes, allowing them to avoid filing a gift tax return if no other gifts are made to the same beneficiary during that period.

A ($38,000) is incorrect because this represents only one year of gifts from both spouses ($19,000 × 2). B ($95,000) is incorrect because this is the superfunding amount for one individual ($19,000 × 5), not a married couple. D ($380,000) is incorrect because it incorrectly doubles the married couple amount.

D is correct. Under SECURE Act 2.0 (effective 2024), unused 529 plan funds can be rolled over to a Roth IRA in the beneficiary's name if the 529 plan has been open for at least 15 years, with a lifetime rollover limit of $35,000. Annual rollovers are limited to the annual Roth IRA contribution limit, and contributions made in the last 5 years (plus earnings) are not eligible for rollover.

A (5 years, $10,000 limit) is incorrect because the account must be open for 15 years, not 5, and the lifetime limit is $35,000, not $10,000. B (10 years, no limit) is incorrect because the requirement is 15 years and there is a $35,000 lifetime limit. C (any plan regardless of age) is incorrect because the 15-year account age requirement must be met before rollovers are permitted.

C is correct. UGMA/UTMA custodial accounts are considered student assets and are assessed at 20% for financial aid calculations, meaning they significantly reduce aid eligibility. In contrast, parent-owned 529 plans are assessed at only 5.64% as parental assets, making them much more favorable for financial aid purposes. This is a critical distinction when advising clients on education funding strategies.

A (reverse treatment) incorrectly reverses the assessment rates. B (both at 20%) is incorrect because 529 plans receive favorable 5.64% assessment as parental assets. D (neither counted) is incorrect because both account types are counted for FAFSA purposes, just at different rates.

A is correct. Coverdell ESAs allow tax-free distributions for a broad range of K-12 qualified expenses including tuition, fees, books, supplies, and equipment. In contrast, 529 plans are limited to $10,000 per year for K-12 tuition only. This makes Coverdell ESAs more flexible for elementary and secondary education funding, despite their lower contribution limits.

B (reverse treatment) incorrectly reverses which account type covers full K-12 expenses. C (both unlimited) is incorrect because 529 plans have the $10,000/year K-12 tuition limitation. D (neither covers K-12) is incorrect because both account types can be used for K-12 expenses, though with different limitations.

A is correct. This is the EXCEPT question, so A is the false statement. UGMA/UTMA gifts are irrevocable and the beneficiary cannot be changed once the gift is made. This is a critical difference from 529 plans and Coverdell ESAs, which do allow beneficiary changes to other family members. Once assets are transferred to a UGMA/UTMA account, they belong to that specific minor permanently.

B (irrevocable gifts) is true. UGMA/UTMA gifts cannot be taken back by the donor. C (minor's SSN) is true. The account uses the minor's Social Security number and the minor files tax returns for account income. D (fiduciary duty) is true. The custodian must manage the account for the minor's benefit and cannot use funds for the custodian's own purposes.

C is correct. The age at which a UTMA beneficiary gains full control of account assets is determined by state law and varies by state. Most states set the age of majority at either 18 or 21, though some states allow UTMA accounts to specify transfer ages up to 25. The specific age depends on the laws of the state where the account was established.

A (always 18) is incorrect because UTMA transfer ages are state-determined and not uniform across all states. B (always 21) is incorrect for the same reason. Different states have different rules. D (custodian chooses 18-25) is incorrect because while some states allow delayed transfer up to age 25, this must be specified when the account is opened and must comply with state law, not custodian discretion.