Custodial accounts are adult-managed investment accounts for the child’s use and benefit. They have long educated young people about money and asset management while funding some of their expenses. Many financial advisors manage custodial accounts to help parents give their children a boost.
Also called UGMA or UTMA accounts, they are established under the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act. UGMA accounts are limited to holding financial assets, such as stocks and bonds. UTMA accounts can include many other investments, such as art and real estate.
Custodial Account Features
Custodial accounts often fund education and certain other expenses that specifically benefit the child without withdrawal penalty. There are also no income or contribution limits, but the custodian should be mindful of the annual gift tax exemption. The unearned income, such as dividends and capital gains, is also subject to “kiddie tax” rates, which allows growth at a reduced tax rate.
Regarding responsibility, the custodian has a legal duty to manage the account in the beneficiary’s best interest. Custodians also cannot buy on margin or high-risk assets, such as derivatives. Many custodians open their accounts with financial advisors that have a fiduciary duty to their clients. Doing so assists with sound decision-making, fulfilling legal duty, and getting advice regarding allowed withdrawals.
Drawbacks
While considering ways to transfer large amounts of wealth to heirs, using a trust may be the better option. Money transferred to a UGMA or UTMA account irrevocably becomes property of the child. The custodian cannot reclaim the assets or, without penalty, withdraw for everyday living expenses.
As well, once the beneficiary child reaches adult age, they gain complete control over the account. The new account holder may do everything from liquidating the account to granting the custodian power of attorney. Financial advisors can help investors discern between opening a trust or custodial account for transferring wealth.
Opening an Account
For adults interested in getting their children started with financial education, First State manages both custodial accounts and trusts, maintaining fiduciary duty to the highest integrity. For a free consultation with expert Tulsa financial advisors, contact us today at 918-492-1361.
This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.