Giving money or other assets to children results in a couple of tax breaks for you. That can be an attractive estate-planning tool for parents and grandparents who would like to distribute assets from their estate before they die. While such gifts can reduce the taxes on your estate, however, they have no immediate impact on your income tax. Donations to charities can be deducted on your tax return, but gifts to individuals cannot. Nevertheless, you do gain certain income-tax advantages.
Custodial accounts have a couple of drawbacks.
Assets given to a child belong to the child irrevocably. That means you can't get them back, but the child can get them as soon as he or she reaches the legal age in your state. Fortunately, most states have raised that age to 21, or allow you to specify an age between 18 and 21 or even older, making it less likely that kids will squander the money on a sports car instead of paying their college tuition. Yes, because schools usually expect a bigger contribution from a student's assets than from a parent's. But don't let financial aid eligibility alone determine whether you save in a child's name.