The custodian of the account, usually the parent or guardian, has control over the account until the child reaches the age of majority. The custodian can also make investment decisions and withdrawals, but only when they are for the benefit of the beneficiary. However, the money in the account belongs to the beneficiary, or the child.
Custodial accounts can hold gifts from parents, grandparents and other adults. Once the gift is made, the donor/transferor gives up all rights to the assets, the minor becomes the owner and the gift may not be revoked or changed. When the minor reaches the age of termination (typically 18 or 21, but some state laws allow an older age), they gain control over the assets.
Once the transfer is made, the minor becomes the owner of the assets and distributions must be used for their benefit.
If you are looking to give a minor investments or cash, you may want to consider opening a custodial account. Assets in this account can only be used to benefit the minor who is the account owner and can be used in different ways. Custodial accounts have few rules other than the account must benefit the minor. Also, there are no limits on contributions (other than the annual federal gift tax exclusion amount of $17,000 per contributor, per beneficiary). In addition, a custodial account has many investment options. However, there are a few reasons you might want to look into other financial tools. If you are looking for tax benefits, there are alternatives that a financial advisor can suggest. A custodial account’s beneficiary cannot be changed and parents have less control over this type of account. Also, this account is considered an asset of the minor, so it may reduce financial aid eligibility. If you are interested in setting up a custodial account, you may want to meet with a Financial Advisor. Find an Edward Jones Financial Advisor to get started.
What's the difference?
There are two main types of custodial accounts: Uniform Transfer to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA). The main difference between the two accounts is that a UGMA allows for the contribution of cash and other financial assets like bonds and stocks. A UTMA allows for the same contributions as a UGMA along with physical assets like real estate and jewelry. While UGMAs are available in every state, UTMAs are not available in some states. Contact a financial advisor to learn more about your eligibility.
Custodial accounts have flexibility in how distributions can be used as long as it benefits the minor who is the account owner. Distribution approval depends on factors related to each specific situation, but common requests include:
- School tuition
- Transfer to a Custodian 529
- Extracurricular training Summer camps
- Cars for minors at or near driving age
- Dental procedures
For custodial accounts held at Edward Jones, when the former minor reaches the age of termination (typically 18 or 21, but some state laws allow an older age), the account is restricted and no further instructions will be accepted until the account assets are transferred to an account, such as an individual account, for the former minor. Once transferred, the former minor can conduct account transactions. At this point, the custodian is no longer authorized to provide instructions on the account.