Custodial accounts

Custodial accounts are opened for minors (under age 18). An adult custodian opens the account and manages the assets on the minor’s behalf, but the assets in the account legally belong to the minor. Custodians are typically parents, but they can be any eligible adult. Each custodial account allows only one custodian and one minor.

If you want to open a custodial account for a child, you’ll need the child’s Social Security number (SSN). Taxes are reported under the minor’s SSN, which is often an advantage because minors typically have little or no taxable income.

The two types of custodial accounts are UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfer to Minors Act), named after the laws that created them.

UGMA accounts were created first. They require the custodian to turn control of the assets over to the minor at the age of majority (usually 18 or 21, depending on the state). UTMA accounts were created later and may allow the custodian to delay the transfer of assets (up to age 25, depending on the state).

A custodial account is a type of fiduciary account. A fiduciary must put the account owner’s interests ahead of their own. That means the custodian must invest and manage the account for the minor’s benefit and avoid actions that primarily benefit the custodian.

In addition, custodians can’t use certain higher-risk strategies in UGMA or UTMA accounts. Examples of prohibited activities in fiduciary accounts include short sales, margin, and some option strategies.

All gifts made to a minor’s custodial account are irrevocable, meaning they can’t be taken back. The custodian may withdraw funds only to pay for items that directly benefit the child*, or the custodian may leave the assets in the account until they must be turned over when the minor reaches adulthood. Also, the assets in a custodial account can never be transferred to another beneficiary. In other words, once a contribution is made, it becomes the minor’s money.

*Withdrawals from custodial accounts may not be used for essential living expenses, which include food, clothing, and shelter. However, they may be spent on non-essential items that will directly benefit the child, including the cost of summer camp, a computer, a car, education expenses, etc.