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Building a nest egg for the next generation obsesses many parents. One key tool in wealth-accumulating and -preserving comes in two little words: custodial account.
A custodial account is simply an investment account that’s in a child’s name but managed by an adult. It offers considerably more flexibility than other traditional child-oriented savings and investment options (think 529 plans and education savings accounts). Like a trust, another go-to, generational-transfer vehicle, it keeps control in the hands of a parent, grandparent, or guardian — but is much cheaper and easier to create.
Custodial accounts do come with caveats — the chief one being the child gets to take over the account upon becoming a legal adult, which means having control of a potentially big sum at a pretty tender age (18 or 21).
Here’s everything you should know about custodial accounts.
What is a custodial account?
Strictly speaking, any account opened and operated on behalf of someone by another responsible party — a fiduciary, bound to act in the account owner’s best interests — can be considered a custodial account.
Fast fact: 401(k) plans are technically custodial accounts, with the employer and the plan administrator acting as custodian for the employees.
But most people use the term to mean a financial account that an adult controls for a minor, typically a child or grandchild. This adult acts as the account custodian — that’s why the name “custodial account” — for the minor, who is the beneficiary and technical owner of the account.
Custodial accounts for minors come in two varieties. The main difference involves the types of assets each can hold.
Uniform Gift to Minors Act (UGMA) accounts can hold most types of financial assets, including things like cash, stocks, bonds, annuities, and insurance policies. But they are limited to these liquid assets. All 50 US states allow UGMA accounts.
Uniform Transfers to Minors Act (UTMA) accounts can hold any sort of asset. That includes alternative investments like real estate, intellectual property, artwork, and collectibles. South Carolina is the only state to not allow UTMA accounts.
Take note: Though often lumped together, a custodial account is not quite the same thing as a guardian account. Owners/beneficiaries of guardian accounts can include minors but are also often adults who are unable to manage their money due to mental or physical disabilities. Setting up a guardian account requires a court order with specific instructions around the management of the account and its funds. How to open a custodial account
Parents, grandparents, and guardians can establish custodial accounts at banks, credit unions, brokers, and financial services companies — both the traditional brick-and-mortar kind, like Vanguard, Fidelity, and Charles Schwab, or online platforms/apps, like Etrade, Acorns, and TD Ameritrade.
These financial institutions set the terms of the accounts: initial investment requirements, minimum account balances, interest rates, management fees. Usually, these terms are pretty much the same as that of any of the firm’s regular accounts.
Anyone — parents, relatives, friends — can put any …read more
Source:: Business Insider