Custodial Accounts
Give a gift to a child—and introduce investing skills early.
Give a gift to a child—and introduce investing skills early.
A custodial account can be an excellent way to make a financial gift to a child—whether your own, a relative's, or a friend's. This type of account, established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), is set up by an adult for the benefit of a minor.
Once the account is opened, it can provide an opportunity to teach some basic investing skills. You might talk about goals and discuss investment choices, review account statements, and discuss gains and losses.
Frequently asked questions (FAQs) for custodial accounts
Review these FAQs to determine if a custodial account is right for your particular circumstances.
Frequently asked questions (FAQs) for custodial accounts
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
Keep learning
Keep learning
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