EP 20: What Is English For “Custodial Accounts?”
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In today's "Shortie" episode, we define "Custodial Accounts." Until a child is a legal adult, they can't technically own anything.
So how do we help these kids own "stuff," like investment accounts?
Hence custodial accounts - What are they? When is it best to use them?
Does it make sense to use them instead of 529's?
We answer this and more questions that pertain to custodial accounts.
The speakers' views and opinions discussed in this episode should not be considered financial, tax, or legal advice. Consult your advisor for any legal, cross-border tax, and financial advice.
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Manasa Nadig, EA (00:00.26)
the sprint to the shorty.
Jane Mepham, CFP (00:01.126)
And we are back with another shorty episode, which is where in 10 minutes or less, we take a term used in the cross -border space, the financial planning space, and tell you what it is in common English. So today's topic or terminology is gonna be a custodial account. We're gonna tell you what that is, who can use it, where you can use it.
and why you'd even want to use it. Manasa, what do you think?
Manasa Nadig, EA (00:33.604)
Absolutely. Let's get into it, Jane. So in the US, a minor is someone who's under 18 years of age and they cannot make legal and financial decisions, including owning assets and voting. This means that they cannot legally own bank and investment accounts. So to get around this, they can have a custodial
or a joint account with an adult. A custodial account is a type of savings or investment account set up for the minor by an adult and the adult is usually a parent or a guardian and the adult operates the account on behalf of the minor. Did I get that right Jane?
Jane Mepham, CFP (01:31.27)
I think you did. So to explain it, further, I think we still got some time. I'll give you a couple of examples of custodial accounts. So for example, a savings account at a bank can be opened as a custodial or a joint account. And this is great if you're trying to teach your kids how to get started on these whole.
money journey. So for example, we actually did that for our kids when they got to 18. We all made a trip to the bank because we made a big deal out of it and we opened a joint account. We give them their own bank cards, meaning they can actually operate the account on their own. Because it's joint, we still see everything that goes on. I think that's probably one of the best ways of doing it.
But the custodial accounts that when people think the word custodial that comes to mind is one what's called a UTMA, which stands for uniform transfer to minors act or a UGMA, which stands for uniform gift to minors act. This is a custodial account again, opened by the adult on behalf of the minor.
And the key thing is whatever you put in this account, it's what we call an irrevocable gift. Once you put that money in, you cannot take it out. You can take it out to use it on the kid, but you need to be very careful. So I've seen a case where somebody says, oh, I use the UTMA to take all the kids to Disney. Uh -uh. That's not what we're talking about. It needs to be specific to this kid.
So another way that I've seen it used is where a grandma or grandpa wants to give little Johnny, their grandchild some money, but they don't want it to go through the parent for whatever the case is. They give that gift and they can put it into this account. I mean, the parent still has to operate it, but for all intents and purposes, it's the child's gift. It's what you'd use instead of using a trust to hold, you know, money for the, for the kids.
Jane Mepham, CFP (03:43.622)
The main difference between the two, UTMA and UGMA, is that the UTMA will strictly hold, what did I say them differently? Yeah, UTMA can actually have, I'm sorry, pause.
