Custodial Bank Account Rules

When funds are transferred to a minor child`s deposit account with a financial institution or brokerage firm, the funds now belong irrevocably to that child. While a parent can and usually does act as an administrator (manager) of the account, the money can only legally be used for expenses that benefit that child. In other words, the law prohibits parents from using the deposit money for expenses that only benefit them (like cosmetic surgery and an expensive new wardrobe). My mother-in-law opened savings accounts for my children. She put the names of the S.S.# children on the accounts, and she was the tutor. She closed it and kept the money. The bank is of no help in the situation. They said there were no laws against what she had done to my children. Once you open a custodian account, they work like any other account with a bank or brokerage firm. Custodian accounts have two main roles: custodian accounts derive from the Uniform Law on Gifts to Minors (UGMA) of 1956, which designates a custodian bank to manage the account until the child reaches adulthood. The parent or guardian may act as guardian or appoint another adult as guardian. In general, the role of the custodian is to manage the assets of a custodian account in order to buy, sell and/or reinvest the profits.

If necessary, the administrator can withdraw money from the account if it benefits the child. Therefore, they are unlikely to allow the custodian bank to use the account to trade margin or to buy equity futures, derivatives or other investments that are highly speculative and inappropriate for the miner. Quick fact: 401(k) plans are technically accounts held, with the employer and plan administrator acting as custodians for employees. Deposit accounts come in two basic variants: the accounts of the Uniform Transfers to Minors Act (UTMA) and the former accounts of the Uniform Gifts to Minors Act (UGMA). Their main difference lies in the type of assets you can contribute to them. As mentioned above, you can use custodian accounts to invest in a variety of assets and investment vehicles, although the institution offering the account will likely limit certain types of investment decisions. Often, the goal of creating a deposit account is to allocate funds to pay for university (see our focus on saving for education for a broader discussion of college saving). If the funds are used to pay for college and related education fees, there may not be much money left in the account when your child reaches the age of majority, so this transition won`t be very important.

In principle, a deposit is set up to protect the financial assets of a minor child. In most cases, the account is created by the child`s parent or guardian for one of two functions. However, when it comes to opening and managing a custodian account, there are custodian account rules that you need to be aware of so as not to conflict with the rules or regulations. The assets of the deposit account belong to the child for whom the account was created. While it is true that the child does not control the account until the child has reached the required age, the child is the rightful owner from the outset. As a rule, the assets are deposited into the account as a gift for the child. You have many different options for custodian accounts, including investing with a broker or bank. If you want to explain the investment to a child, you want an investment account for your children.

A simple bank account that earns interest will not reach the brand. Understanding the pros and cons of a deposit account If the minor dies before reaching termination age, the account is part of the child`s estate. So use the deposit account not only to create wealth for your children, but also to teach them financial responsibility. I think the deposit account is a great opportunity for parents to help kids manage their personal finances and save for school! Another good idea might be to supplement the deposit with an automatic savings program so that children can use some of their personal money for future financial goals. In this case, parents can reward the children, for example by balancing their savings. Children`s participation in the construction of their depot will increase their financial responsibility. No. Money and property deposited in a deposit account immediately and irrevocably become the property of the child.

In other words, you can`t take back the assets or pass them on to someone else. Another important difference between a UGMA account and a UTMA account is the state adoption guidelines. All states have introduced UGMA accounts, but Vermont and South Carolina have not authorized UTMA accounts. For 2019, as a parent, you can use the annual exclusion from federal gift tax to transfer up to $15,000 to a deposit account for each of your children. If you are married, your spouse can do the same. You can do the same thing next year, and the year after, and so on. Donations up to the $15,000 annual limit (for 2019 and likely for the next few years) will not reduce your flat exemption of $11.4 million for gift and estate tax (for 2019). Probably the most common reason parents create deposit accounts is to save for a child`s college, which they think is a tax-smart way. Or a deposit account could be set up to hold generous annual gifts to your child from good old grandfather Henry. The potential problem: Some parents don`t realize that deposit accounts have significant tax and legal implications.

When you create a deposit account for a child, it learns how to invest their money and gives them the opportunity to learn more about money management. Obviously, this can be a fine line between expenses that benefit the child and those that benefit you or other family members. Just understand that the funds in the deposit account are not for you to use in any way you choose, even if you are the one who funded the account. According to the law, the balance of the deposit can only be used for the benefit of the minor child. If the donor of the account is also the custodian, the trustee`s balance will become part of the donor`s estate if the donor dies while acting as custodian. While this is a risk to parents, it is an even greater risk to grandparents, so we recommend that grandparents refrain from acting as guardians of the accounts they fund. Parents should consider this risk when deciding whether or not to act as guardians of the accounts they fund for their children. If the grandparents create a deposit account and designate the parents as custodians, the custodial assets can still be considered part of the parents` estate, but will not be included in the grandparents` estate.

Since all assets held in a custodian brokerage account legally belong to your child, they weigh more heavily in the calculations of the Free Federal Student Aid Application (FAFSA). Funds held in 529 accounts are considered less robust. However, keep in mind that even the money in a child`s savings account or checking account is weighed heavier than the money in a 529 plan. Custodian accounts are easier to set up than trusts, which typically require more planning and the help of a lawyer. However, a trust can offer more flexibility, control and protection than a custodian account. For example, you can designate beneficiaries for a trust. If the custodian is also the legal guardian or parent, they should seek financial advice on the appropriate use of the funds. There are authorized distributions that can be applied. In general, the account cannot be used to pay for the day-to-day expenses that the guardian or parent is legally required to cover.

Once the minor has reached the age of termination, usually the same age as entering adulthood, the custodian relinquishes control of the account. At that time, the assets are transferred to the designated beneficiary, who can then claim full use of the funds held in the account. Custodian brokerage accounts do not have the same restrictions as 529 accounts, which can only be used to fund education expenses. Once a child becomes the owner of their custodial brokerage account, they can use the money for anything from education fees to a down payment on a home. .