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We recently opened a UGMA account for our daughter that is intended to be used as a parking place for any spare petty cash she has. I do not expect the account to hold more than several hundred dollars, and perhaps spike to a grand or two as she starts working summer jobs for extra cash. Even though my wife is technically the custodian, we have handed our daughter the ATM card and told her that she is free to deposit and withdraw from the account as she pleases.

After reading up on UGMA I am bit concerned about the legal status of the account. As a custodian, my wife is techncally liable for ensuring that the money in the account is used "for the benefit of the minor". I even read that documentation must be maintained on all withdrawals from the account, in order to justify (presumably to the IRS) that the money is used to benefit the minor. That means that if one day our daughter decides to blow $2000 on makeup and Justin Timberlake posters, my wife can be held liable for mismanaging the account.

I have a few questions on this whole topic.

1. Do we have any obligations to the IRS with this account, except for paying taxes on all interest income exceeding $700?

2. I have no concern that our daughter would sue us for letting her spend her money :-), but the state and/or US governments are a whole different beast. Are there any negative tax or other implications in allowing our daughter to withdraw money from the account at will.

3. I read somewhere it is desirable to maintain documentation on all withdrawals from UGMA accounts in order to be able to prove that the expenditure is for the benefit of the minor. Does that mean that we should not be using this account to teach her about managing a bank account because uncle Sam can decide that lipstick and CDs do not benefit her very much and stick her mother in a minimum security correctional facility :-)?

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