Investment Planning for Minor Children
Essentially, there are four ways to give property to a child:
Give outright (a gift)
Give in a trust
Give by way of a guardianship
Give through the use of a custodial account
No different from anything else, each method has its pros and cons. For example, a parent might be reluctant to give property outright to a child they know will quickly spend the money. Other parents, frankly, are not interested or maybe cannot afford the legal fees for having an attorney draft up a trust.
Given these situations, a custodial account has often been the reasonable solution for parents setting aside assets for their children. Most state laws allow parents or guardians to establish these accounts under either the UGMA or UTMA guidelines.
Overseeing the Account
It’s important to draw a distinction between who does what when managing a custodial account.
On one hand, you have the investment manager, a financial professional who manages the account assets (investments). On the other hand, you have custodians, who are responsible for ensuring account property is used for the maintenance, support, and overall well-being of the child.
Often, the custodian is the child’s parent, as it’s more practical. However, a bank or trust company can individually or jointly serve as a custodian to manage account assets.
Please understand something.
While the process of setting up a custodial account is pretty straightforward, there are stern legal and tax ramifications once a parent funds a custodial account. Custodial accounts are irrevocable. In other words, once funded, parents cannot get the money or assets back, as those now belong to the minor child.
Further complicating things is the fact that all property in the account must be distributed to the child when he or she reaches the age of majority (typically 18 or 21, although it can be extended to 25 in some cases).
The above two reasons are what make the need to understand custodial accounts so important. As a parent, you must constantly access the financial responsibility of your children if you plan to make substantial and recurring gifts or transfers to these kinds of accounts.
In the End
A custodial account is a powerful, relatively simple tool for transferring assets to minors.
Is it the right fit for you and your family? Maybe.
Feel free to schedule an appointment so we can go over your goals and help answer that question.
Questions?
We’d be happy to address any questions or concerns you have around any of our investment accounts.