What Is A Custodial Investment Account?
A custodial investment account is a financial vehicle that allows an adult to fund and use an account for the benefit of a minor. The long-term goal is that when the child reaches the age of majority the adult can then turn the account over to them with the benefit of years of investment returns. Before you arrange an investment account for kids, it's prudent to know more about the implications and advantages.
Custodian
The custodian is the adult who controls decisions about the account while the beneficiary is still below the age of majority. Custodians are usually parents or relatively close relatives, but any adult can set up an account with any minor as a beneficiary. The custodian then has the final say regarding transactions. If the custodial investment account is with a stock brokerage, for example, the custodian can determine whether to buy or sell securities.
Many custodians allow older minors limited control of their accounts. If you have a 16-year-old, for example, this is a good way to give them a leg up on learning investing basics. There are guardrails in place so the custodian can always stop any potentially reckless decisions.
Notably, the custodian doesn't have to allow the minor access to the account. They can merely manage it and then turn it over when the child reaches the age of majority. Depending on the state, the age of majority lands somewhere between the ages of 18 and 21 years.
Kinds of Accounts
A custodial investment plan doesn't have to involve anything as aggressive as trading stocks. It could also operate as a savings account or even a mutual fund. Many people elect to invest in historically safe financial products like Treasury and municipal bonds, too. Lots of folks consider it ideal to focus on safe investments to ensure the money will grow relatively consistently over the coming years.
Fiduciary Duties
A custodian has fiduciary duties. This means they must operate the account in the best interests of the child. Fiduciary duties are legally enforceable. This means a beneficiary upon reaching majority could sue the custodian for negligence or fraud if the custodian used funds for personal benefit or simply made little effort to manage the fund competently.
Custodial accounts afford significant legal protections for children's interests. If a child becomes an internet star, for example, a parent might want to protect the kid's profits by placing them in a secure account. The law requires both the parent and the financial institution to manage the money responsibly. It also guarantees the transfer of the account when the child becomes an adult.
For more information on custodial investment, contact a professional near you.
