Custodial Accounts

Frequently asked questions (FAQs) for custodial accounts

Can I change my mind and take back assets after I've set up a custodial account?

No. Money and assets deposited into a custodial account immediately and irrevocably become the property of the child. In other words, you can't take the assets back or give the assets to someone else.

What are the custodian's responsibilities?

The custodian has sole responsibility to manage the assets for the minor until the custodianship ends. As a donor, you can designate yourself or another adult to be the custodian of the account.

At what age does a child take control of the assets in the account?

In some states a custodian can specify the age—18, 21, or even older—when the child will take control of the account (also called the "age of majority"). It is important to do this when you open the account, since you cannot make any changes later. Be sure to ask a Financial Consultant about the laws in your state.

Will I have any control over the account after the child reaches the age of majority?

When the custodianship ends, the account holder (formerly a child, now legally an adult) will have complete control over the account, and the custodian's access to the account may be restricted. At the age of majority, the account holder may choose to sell any investments in the account or close the account and request a check for the proceeds. Alternatively, he or she may convert the account to his or her own name, establish the custodian as a joint account holder, or grant the custodian power of attorney on the account.

Is a custodial account a good way to help educate children about money and investing?

Yes. With a custodial account, you can explain that the money belongs to the child and that you are investing it for him or her. By showing a child the investment mix, types of assets, and performance reports, you can educate him or her about investing.

Can assets in a custodial account be used to pay for expenses for a child?

All custodial assets must be used "for the use and benefit of the minor." While this may be subject to interpretation, it's clear that custodians should never use the money for everyday living expenses. If the custodian is the child's parent or legal guardian, it's a good idea to get advice from a financial advisor regarding allowed distributions before making any withdrawal from the account for the benefit of the child.

Should a custodial account be used to save for college expenses?

Probably not. You shouldn't transfer significant assets to a custodial account if you think the child may need to apply for financial aid. Assets held in a child's name, as in a custodial account, weigh more heavily against financial aid eligibility than do the parents' assets or assets held in a 529 account or an education savings account (ESA). In addition, a custodial account doesn't have the same tax advantages as a 529 or an ESA. Finally, 529s and ESAs offer parents more control, including the ability to change the account beneficiary.

What's the difference between a custodial account and a trust?

Custodial accounts are simpler to establish than trusts, which generally require more planning and the help of an attorney. However, a trust can offer more flexibility, control, and protection than a custodial account. For example, you can designate beneficiaries for a trust.

What are the tax considerations for custodial accounts?

Any investment income—such as dividends, interest, or earnings—generated by account assets is considered the child's income and taxed at the child's tax rate once the child reaches age 18. In 2022, if the child is younger than 18, the first $1,150 is untaxed and the next $1,150 is taxed at the child's rate. Anything over $2,300 is taxed at the parent's rate.

 

In 2022, anyone can give a monetary gift of up to $16,000 (or $32,000 per couple splitting gifts) to each recipient without incurring federal gift tax. (This rule applies to custodial accounts as well as most other forms of gifts. You may accelerate up to five years' worth of the annual exclusion amount (5 x $16,000) to a 529 plan and reduce the value of your estate by contributing up to $80,000 ($160,000 for married couples filing jointly) per beneficiary. (This amount is subject to "add-back" in the event of the participant's death within five years and also assumes no other gifts are made to the same beneficiary during the same period).

 

Is a custodial account an appropriate way to transfer significant wealth to children?

No. If you want to transfer a large sum of money to a minor (for example, tens of thousands of dollars), doing so as part of a comprehensive estate plan involving a trust is often the best choice.

What happens to the assets in a custodial account in the event of a death?

If a donor acting as the custodian dies before the account terminates, the account value will be included in the donor's estate for estate tax purposes. If a minor dies before the age of majority, a custodial account is considered part of the minor's estate and is distributed according to state law.
 

As with any investment, it's possible to lose money by investing in a 529 plan. Additionally, by investing in a 529 plan outside your state, you may lose tax benefits offered by your own state's plan.