Key Set


Gregory S. Dupont Feb. 11, 2019

Parents who would like to give property to their minor children may be unaware of their options regarding the ways in which property can be held for the benefit of their children. Essentially, there are only four ways in which a parent can give property to a child: 1) give it outright; 2) give it in a trust; 3) give it by means of a guardianship; or 4) give it through the use of a custodial account.

Each method has advantages, as well as drawbacks. For example, many parents may be reluctant to give property outright to a spendthrift child, while others simply cannot afford the legal services necessary to have an attorney draft a trust. Also, a guardianship may be impractical or unnecessary in some instances.

Given these parental concerns, the custodial account has been favored by parents and their financial professionals since its inception many years ago. Most state laws provide a way to establish a custodial account under either UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act).

A custodial account can be thought of as a “poor man’s” trust. All that needs to be done for paperwork purposes is to have the property registered with a brokerage house, insurance company, or bank as follows: “Mr./Ms _______as custodian under the State of________ Uniform Gifts to Minors Act.” It’s so easy and commonplace that most financial services companies can now help you set up a custodial account.

While the mechanics of actually setting up the account are simple, serious legal and tax consequences result once a parent funds a custodial account. For example, the account is irrevocable—once funded, you cannot get the money or the assets back.

Complicating matters is the fact that property in the account must be distributed to the child when he or she reaches the age of majority (typically either age 18 or 21, although it can be extended to age 25 in some cases). The ability of children to assume financial responsibilities is often a parental concern.

When you give property to your children using a custodial account, you have made a completed gift for both state and federal gift tax purposes. Care should be taken to keep annual gifts under the $14,000 (in 2015) individual—or $28,000 (in 2015) split gift— annual gift tax exclusion.

One of the most important factors affecting custodial accounts is the choice of the custodian. While a bank or trust company could serve as custodian, many parents may find it more practical to have an individual serve. However, if a parent serves as custodian, the entire value of the account will be included in the parent’s gross estate if the parent dies while serving as custodian. This rule often leads to choosing a relative to serve as custodian.

Once the custodian is appointed, he or she must take care to see that custodial property is used only for the maintenance, education, support, and overall benefit of the child. Depending on state law, there may be limitations on the custodian’s ability to invest in certain assets. 

The custodial account is a powerful, but relatively simple, financial strategy tool for transferring assets to minor children. While it may not be a perfect fit for everyone, it is certainly worth reviewing how it might work for you and your family.