Setting up a custodial account is as easy as filling out a form. But these accounts aren’t as simple as they seem, and when you put assets into a custodial account you can’t take them back. So whether you already have a custodial account or you’re considering opening one, get all the details. Also consult a tax advisor or estate planning professional, if necessary.
Custodial accounts, originally established under the Uniform Gifts to Minors Act (UGMA), provide a convenient, legal way to transfer ownership of assets to a child.
In most states, custodial accounts are now governed by the newer Uniform Transfers to Minors Act (UTMA), which allows transfers of any kind of property. Although these laws are called uniform, they vary in their exact provisions from state to state.
Under the UGMA and UTMA rules, an adult donor creates a custodial account on behalf of a minor. An adult custodian then manages the account until the child reaches the age when control passes to him or her. Parents can act as custodians, or in most states, they can name another adult to act in that capacity.
Custodial accounts allow you to invest in cash, CDs/share certificates, U.S. Savings Bonds, mutual funds, stocks, bonds, and most any other type of investment.
Under the UTMA rules you can invest in any type of real or personal property. Under the UGMA rules you can invest in most types of property, specifically excluding real estate and artwork.
Assets you put into custodial accounts are irrevocable gifts. That means you’re not allowed to change your mind and take your property back. Your child becomes owner of these assets as soon as you make the transfer.
Consequently, if there are assets remaining in the account when control passes to the child at the age specified in the state law, you must transfer them to your child, who can then use them in any way he or she chooses.
Most states set 21 as the age custodial accounts end. However, some states set age 18. Other states set an age between 18 and 21, or between 18 and 25, which you’re allowed to specify when you open the account.
Transferring ownership of assets to your child may limit your family’s eligibility for needs-based federal financial aid, such as grants, scholarships, and loans. That’s because under the current federal financial aid rules students are expected to contribute 35% of their assets towards college expenses each year, while parents are only expected to contribute 5.6%.
So consider your family’s financial aid eligibility now, even though the rules may change, as may your financial situation. Remember, though, most financial aid is awarded in the form of loans and non-needs based aid is available if you don’t qualify for needs-based aid.
Before you set up a custodial account consider whether keeping your assets in your own name is more appropriate for your situation. Retaining control of your money may turn out to be a smart move if you end up needing the money for your own uses – say for a house or for an emergency if you run into hard times.
Custodial accounts are best suited for small amounts and make the most sense when you genuinely want to make a financial gift to a child. If you’re giving significant sums to your child or your family has special needs, trusts provide greater control and flexibility.
If you’re saving for your child’s college education, tax-advantaged alternatives to consider include an education savings account or a 529 college savings program.
Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.
Representatives are registered, securities are sold, and investment advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, 2000 Heritage Way, Waverly, Iowa 50677, toll-free (800) 369-2862. Nondeposit investment and insurance products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the financial institution. CBSI is under contract with the financial institution, through the financial services program, to make securities available to members. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America. The Representative may also be a credit union employee that accepts deposits on behalf of the financial institution.