Opening a custodial account for a minor is a way to start planning for the future. These savings accounts, stocks, mutual funds and other investments give children an opportunity to watch their money grow and learn to make decisions about their finances before they graduate from high school. However, you may find other options for the funds and need to close the custodial account.
Custodial accounts were instituted by the Uniform Gift for Minors Act (UGMA) and, later, the Uniform Trust for Minors Act (UTMA), and are referred to as such by many financial institutions. Because children under the age of 18 are not able to own assets without legal representation to develop a trust for the minor, UGMA/UTMA accounts require an adult custodian to handle them in the best interest of the child. The funds belong to the minor named on the account, but the contract with the institution is with the custodian. However, the custodian is obligated to take care of the money until the minor reaches the age of consent.
Once a monetary gift is placed in a UGMA/UTMA, it may not be removed unless it is in the best interest of the minor. It may be transferred to other custodial accounts if it's more beneficial for the child. For example, you may transfer the funds in a regular savings account into a higher-yielding investment or into a 529 college savings account.
The custodial account is terminated when the minor reaches the age of 18 or 21, depending on the state and your election of maturity. Transferring the entire balance into another investment vehicle also closes a custodial account. You are not allowed to withdraw the money and close the account so that you may use the funds. It must always remain in use for the minor.
The entire amount is automatically turned over to the minor after reaching the age of majority, as determined by your state, even if you don't think it will be handled responsibly.
The custodial account balance may reduce the amount of financial aid for college.
Earnings may trigger the need for an income tax return be filed on behalf of the minor.
- The Investment FAQ; Subject: Tax Code - Uniform Gifts to Minors Act (UGMA)
- Fairmark.com; Custodial Accounts 101; Kaye A. Thomas
- Charles Schwab; Transferring a Custodial Account to a 529 Plan: Can and Should You Transfer?; Rande Spiegelman; Aug. 17, 2006
- Fairmark.com; Problems with Custodial Accounts; Kaye A. Thomas