Custodial Account Rules

One of the most important decisions that parents make is creating custodial accounts for their children. 

Custodial accounts allow a custodian, typically a parent or guardian, to have an account held with a financial institution that holds assets for the benefit of the named minor on the account.

What is a Custodial Account?

Once you open a custodial account, they work like any other account held with a bank or brokerage firm. Two main roles exist for custodial brokerage accounts: 1. The custodian 2. The beneficiary

How Does a Custodial Account Work?

- Considered the minor’s asset. The gifts made into the account become the property of the minor and cannot return to the contributor. - Transferred to the minor at a certain age (between 18–25). These assets transfer to the minor at the age of termination, which is often the age of majority in their state of residence unless stated otherwise in the titling of the account.

Custodial Account Rules for Adults and Account Owners (Minors)

- Made with after-tax money, though there are tax benefits. Not as tax-efficient as retirement accounts like Roth IRAs for kids or adults, but the money contributed does enjoy some tax buffer on unearned investment income subject to certain limits. - A brokerage account for investing. These accounts allow you to invest on behalf of a minor, teaching how to do it, how to assess risk and ultimately how to build wealth to last a lifetime.

Custodial Account Rules for Adults and Account Owners (Minors)

Custodian is defined as “the person who manages assets for another” and typically refers to an adult who holds legal responsibility over the account on behalf of the child, usually a parent.

The Role of the Custodian

UGMA (Uniform Gifts to Minors Act) accounts are custodial accounts typically set up by parents, guardians, grandparents or other relatives, who then serve as custodian for the child’s account until reaching the age of termination or majority in their particular state.

What Types of Custodial Accounts Are There?

Swipe up for more ABOUT  Custodial Account Rules