Overview
A custodial account is a financial account set up by a parent, guardian, or other custodian for the benefit of a minor. These accounts allow for the orderly management and gifting of assets to the minor while the beneficiary is still under the age of majority. The custodian manages and controls the account until the minor comes of age, as defined by state law.
Types of Custodial Accounts
- Uniform Transfers to Minors Act (UTMA) Accounts: Allows for more types of property to be transferred to minors, including real estate and fine art.
- Uniform Gifts to Minors Act (UGMA) Accounts: Allows for the transfer of basic securities to minors.
Examples
- Education Savings: Parents may set up a custodial account to save for their child’s college expenses. The funds can be invested in various securities to potentially grow in value.
- Gift of Stocks: A grandfather might gift stocks to his grandson by transferring them into a custodial account, ensuring that the child will receive them upon reaching adulthood.
Frequently Asked Questions
Q: Who controls the assets in a custodial account?
A: The custodian has control over the assets in a custodial account until the minor reaches the age of majority set by state law.
Q: Can the beneficiary make withdrawals or transactions?
A: No, the minor cannot make withdrawals or transactions. Only the custodian has the authority until the minor comes of age.
Q: What happens when the minor reaches the age of majority?
A: Control of the custodial account assets is transferred to the minor, who can then manage the account as they see fit.
Q: Are custodial accounts subject to taxes?
A: Yes, custodial accounts may be subject to taxes under the “Kiddie Tax” rules, which may tax the earnings at the parent’s tax rate.
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Kiddie Tax: Tax regulations that apply to investment income earned by children under a certain age, typically taxed at the parent’s highest rate.
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Trustee: An individual or organization that holds or manages assets on behalf of another. In the context of custodial accounts, a trustee may act as the custodian or oversee the account.
Online References
Suggested Books for Further Studies
- “The Investment Answer” by Daniel C. Goldie and Gordon S. Murray
- “The Millionaire Next Door” by Thomas J. Stanley and William D. Danko
- “Understanding Wall Street” by Jeffrey B. Little and Lucien Rhodes
Fundamentals of Custodial Account: Finance Basics Quiz
### Who controls a custodial account until the minor reaches the age of majority?
- [ ] The minor
- [x] The custodian
- [ ] The state
- [ ] The brokerage firm
> **Explanation:** The custodian, often a parent or guardian, has control over the custodial account until the minor reaches the age of majority.
### Which legislation allows for the transfer of a wider range of properties including real estate and fine art?
- [ ] ERISA
- [ ] UGMA
- [x] UTMA
- [ ] SEC Acts
> **Explanation:** The Uniform Transfers to Minors Act (UTMA) allows for a broader range of properties to be transferred to minors than the Uniform Gifts to Minors Act (UGMA).
### Can a minor make securities transactions in their custodial account?
- [ ] Yes, anytime
- [ ] Yes, with other minor’s permission
- [x] No
- [ ] Yes, provided they have their ID
> **Explanation:** Minors cannot make securities transactions within their custodial account; only the custodian can manage the transactions until the minor reaches the age of majority.
### What typically happens to the control of a custodial account when the minor reaches the age of majority?
- [ ] The account is closed
- [ ] The assets are transferred to a trust
- [x] Control of the assets shifts to the minor
- [ ] The assets are donated to charity
> **Explanation:** Control of the custodial account and its assets typically shifts to the minor once they reach the age of majority.
### What is one of the common uses of a custodial account?
- [ ] Hedging against market risks
- [x] Saving for education expenses
- [ ] Buying cryptocurrency
- [ ] Organizing charitable events
> **Explanation:** One of the common uses of a custodial account is saving for a child's future education expenses.
### What type of tax may apply to earnings in a custodial account?
- [ ] Estate tax
- [ ] Property tax
- [x] Kiddie tax
- [ ] Value-added tax
> **Explanation:** The "Kiddie Tax" may apply, which taxes a child's unearned income at the parent's tax rate.
### Which of the following can be held in a UTMA account but not typically in a UGMA account?
- [ ] Cash
- [ ] Stocks
- [x] Real estate
- [ ] Bonds
> **Explanation:** Real estate is one of the types of property that can be held in a UTMA account but not typically in a UGMA account.
### What entity holds the legal title of the assets in a custodial account?
- [ ] The brokerage firm
- [x] The custodian
- [ ] The minor
- [ ] The state government
> **Explanation:** The custodian holds the legal title of the assets within a custodial account until the minor reaches the state-defined age of majority.
### Once a minor comes of age, can they manage their custodial account as they see fit?
- [x] Yes
- [ ] No
- [ ] Yes, but with custodian’s permission
- [ ] Yes, but only after court approval
> **Explanation:** Once the minor comes of age, they gain full control over their custodial account and can manage it as they see fit, without the need for custodian approval.
### Custodial accounts are often set up at which types of financial institutions?
- [ ] Real estate firms
- [ ] Insurance companies
- [x] Banks and brokerage firms
- [ ] Retail stores
> **Explanation:** Custodial accounts are typically set up at banks or brokerage firms where a variety of financial instruments can be managed.
Thank you for exploring the fundamentals of custodial accounts and challenging yourself with our finance basics quiz! Keep expanding your financial literacy for a brighter future.
