I talked with a Client this week about what to expect as his granddaughter (for whom he has established a custodial account) approaches her twenty first birthday. Let’s take a closer look at custodial accounts as many of your have children in your lives you care about – and the future will be here before we know it.

Custodial Account Mechanics

As you may or may not know, investment accounts (after-tax accounts, IRA accounts, etc.) can be opened on behalf of a minor. However, in order to do so, an adult must also be listed on the account title. This adult is known as a custodian. The custodian has the sole responsibility to manage the assets on behalf of the minor but they no longer have possession of the funds. Any funds put in a custodial account become irrevocable and deemed assets of the minor.

Some states allow you to establish an age of majority when the account is established (18, 21, or even older) – whereas other states have a mandated age of majority. It’s important to review these rules for your state when you open the account (as it cannot be changed).

Should I Use a Custodial Account?

As always, the answer to this will vary by family and their unique situation. There are many beneficial situations for using a custodial account – including teaching a minor about investing (with your oversight) or allowing a minor to get a head start on savings (use of a custodial Roth account is a great tool for this). When it comes to funding education or paying for expenses on behalf of a minor, there may be other tools to consider that are more efficient and beneficial. And further, a custodial account does not take the place of a trust/estate plan so ensure that you evaluate that task separately.

End of Custodianship

When the custodianship ends, the account holder (formerly a child, now legally an adult) will have complete control over the account. The account will be retitled (from a custodial account to a non-custodial account). The custodian will not have legal access to the account and the account holder (ie: the prior minor) can do as they choose with the assets. They can sell the investments, liquidate the account, or manage it on their own. Of course, they have the option to keep the custodian involved if they so choose (by making them a joint holder or giving them power of attorney over the account). But all of these decisions will be the account holder’s decision – not the custodians.

Hopefully this helps give you some perspectives on custodial accounts. As always, we suggest you work with your financial and tax advisors to find the best savings solutions for you and minors in your life.