Introduction
Custodial brokerage accounts, also known as UGMA or UTMA accounts, are investment accounts established for minors and operated by a guardian or custodian who has legal authority over the account’s assets until the minor reaches adulthood. These accounts come with a lot of perks, making them an ideal choice for many parents and guardians who wish to secure their children’s financial future.
In this article, we will discuss everything you need to know about custodial brokerage accounts, including their working, benefits, drawbacks, and frequently asked questions.
What are Custodial Brokerage Accounts?
Custodial brokerage accounts are investment accounts that allow parents, grandparents, and guardians to invest for the benefit of a minor. The account is titled under the minor’s name, but the parent, grandparent, or guardian serves as the custodian or trustee of the account until the minor reaches the age of majority in the state where the account is established.
How Do Custodial Brokerage Accounts Work?
When a custodial brokerage account is opened, the parent, grandparent or guardian transfers assets into the account, such as stocks, bonds or mutual funds, using money gifted to the minor. The custodian or trustee is responsible for making all investment decisions on behalf of the child.
The minor, who is the account beneficiary, has no control over the account until they reach the age of majority. At that point, the custodian relinquishes control of the account to the minor.
Benefits of Custodial Brokerage Accounts
Custodial brokerage accounts come with several benefits, which make them an attractive option for parents, grandparents and guardians looking to invest for their children’s future.
Flexible Investment
Custodial brokerage accounts offer a flexible investment option, allowing the custodian or trustee to invest in different types of assets, including stocks, bonds, and mutual funds, based on the child’s long-term financial goals.
Tax Benefits
A custodial brokerage account provides tax benefits for both the custodian and the child. The custodian may be able to deduct contributions to the account, reducing their taxable income. Additionally, the child’s tax liability on the account’s earnings may be lower than if the investment was in the parent’s or grandparent’s name.
Controlled Costs
Custodial brokerage accounts are popular because they are relatively affordable to set up and operate, with minimal fees charged on the account.
Drawbacks of Custodial Brokerage Accounts
Loss of Control
One significant drawback of custodial accounts is that once the child reaches the age of majority, they will have full control of the funds in the account. The custodian or trustee has no legal authority to dictate how the funds are spent, despite having contributed to the account.
Impact on Financial Aid Eligibility
Custodial brokerage accounts can impact a child’s eligibility for financial aid when applying for college. These accounts may count as assets to the child, which could result in a reduction in financial aid.
Frequently Asked Questions
1. Who can open a custodial brokerage account?
A custodial brokerage account can be opened by a parent, grandparent, or legal guardian, on behalf of a minor.
2. What is the minimum age required to open a custodial brokerage account?
There is no minimum age requirement to open a custodial brokerage account. However, the account beneficiary must be a minor.
3. Can contributions be made to a custodial brokerage account after the minor reaches the age of majority?
No, after the minor reaches the age of majority, the custodian or trustee relinquishes control of the account, and no additional contributions can be made.
4. Who is responsible for taxes on a custodial brokerage account?
The account beneficiary is responsible for taxes on a custodial brokerage account. However, the account’s earnings may be taxed at the custodian or trustee’s tax rate if they are under 18 and earn more than a set allowance.
5. Can the account beneficiary use the funds in a custodial brokerage account for any purpose?
Once the minor reaches the age of majority, they have full control over the funds in the account and can use them for any purpose without the custodian or trustee’s permission.
Conclusion
Custodial brokerage accounts provide an excellent opportunity for parents, grandparents, or legal guardians to secure their children’s financial future. They offer flexibility and tax benefits, making them an attractive option for those who wish to invest in the long term.
However, like all investment accounts, custodial brokerage accounts come with some drawbacks, such as the loss of control over the funds and potential impacts on financial aid eligibility.
By understanding the benefits and drawbacks of custodial brokerage accounts, parents, grandparents, and legal guardians can make informed decisions about whether they are the right investment option for their children.
