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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Speaker 1 (00:06):
Welcome to the International Money Cafe Podcast, the show where we filter out the noise on cross-border taxes, finances, and life in the us. I'm your host, Jen Hamm, certified financial planner, founder and owner of Elgon Financial Advisors,
Speaker 2 (00:21):
And I'm your host, man, Nadi, enrolled agent, owner and founder of Amman Tax and Business Services. Join us on this journey as we explore the unique challenges faced by inbound outbound families and businesses on taxes, compliance, and financial planning. Let's get to the show
Custodial Account
Speaker 1 (00:43):
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 going to be a custodial account. We're going to tell you what that is, who can use it, where you can use it, and why you'd even want to use it. Man, what do you think?
What is a Custodial Account?
Speaker 2 (01:15):
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 account or a joint account with an adult. A custodial account is a type of savings or an 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?
Examples of Custodial Accounts
Speaker 1 (02:11):
I think you did. So to explain it, father, I think we still got some time. I'll give you a couple examples of custodial accounts. So for example, a savings account at a bank can be open as a custodial or a joint account. And this is great if you're trying to teach your kids how to get started on this 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, but 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 counts that when people think the word custodial that comes to mind is one what's called UTMA, which stands for Uniform Transferred to Minors Act or UGMA, which stands for Uniform Gift to Minors Act.
Uniform Gift to Minors Act
Speaker 1 (03:18):
This is a custodial account again opened by the A 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 used the UTME to take all the kids to Disney Uhuh. 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 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 intent and purposes, it's the child's gift. It's what you'd use instead of using a trust to hold money for the kids. The main difference between the two is you can actually have real estate and other physical assets in the UTMA account, whereas the UGMA is strictly investments and cash and mutual funds and that type of thing. So back to you.
UTMA and UGMA
Speaker 2 (04:41):
Yeah, when you're speaking about UTMA and UGMA, I remember one of the CPA firms where I worked with there was this sweet person, and for her, the easiest way to remember was she used to say Auntie Atma and Auntie,
Speaker 1 (04:59):
Oh, I love it, I love it. I'm going to have to start using that.
Speaker 2 (05:05):
Or could be grandma and grandma. I
Speaker 1 (05:07):
Like it. I like it.
Should you Open a UTMA, UGMA or a 529 Plan?
Speaker 2 (05:09):
Yeah. So coming back to this then, should you open UTMA account or should you open UGMA account or maybe open a 5 29 plan? Right. They're all great for saving for college, but when it comes to financial aid, I believe that UTMA or UGMA account could be considered as part of the kids' assets and that could affect how much maybe financial aid and other things that they will get. So that's an important thing to remember. Well though the 5 29 plan grows tax free, but the others don't. And for the UTMA and UGMA, the first $1,250 of earnings are tax free. And after that there are various rules. If the child's earnings go over the 1250, there's something called the kitty tax, et cetera, which we won't have time to go into a shorty episode, but that's something that you should be aware of. I think the parents have more control with the 5 29 because at the age of majority, which is 18 or 21, the kids own the account. So kids own the atma AGMA account and if they think that the kids could go off to Vegas and spend the money, then I think probably Auntie Agma and Auntie Agma being too generous is what I think. But that was what I had, but do you have anything else you would like to share? I know you do. You have a
Roth Account
Speaker 1 (06:49):
Good one. I do actually, and I want to make sure I don't forget this one. So I want to add the other custodial account is the Roth account. So it's a great way to help your kids start saving for retirement. Remember the whole idea of compounding interest. So if you put money into a Roth account when the kids are think 16, 17, and you leave that money alone until 60 or something like that, you are likely going to see some pretty good returns regardless of how this account is growing. The key thing is the kids must have earned income. So if let's say my daughter made 5,000 last year and we are able to put in up to 6,500, we can only put in up to 5,000. And one of the best ways I find of being able to do this or help your kids is open the custodial account, tell them to put in however much they're going to be able to put in based on how much they earned, and then match them at a hundred percent. So if she puts in 2000 and I add 2000, she's going to have up to 4,000. That's just going to let time do it things. So I think they're great ideas, they're great options for your kids. Obviously you need to consider what this means in your situation or in your kids' situation. And I think that's all I had on this since we are up to time. Anything else or you want to close?
Speaker 2 (08:25):
Yeah, let's close this. This is, yeah, say bye to Auntie tma and Auntie Agma. Thank you for listening, dear IMC listener and we'll come back with more shorty episodes for you. And in the meantime, do go check us out at the I am cafe.com. Thanks. Bye bye.
Speaker 3 (08:45):
Thank you for listening to the International Money Cafe podcast. The content is for informational and educational purposes only and should not be used as a for professional advice. Seek the advice of your qualified service provider with any questions you may have regarding your cross order finances and tax needs.