Custodial accounts offer benefits for minor as well as for guardian

Moneyline

July 09, 2000|By Neil Downing | Neil Downing,PROVIDENCE JOURNAL

I am looking for information on the guidelines of a custodian account. I know a few things. But I want to know, when the child reaches the age of 18, what his rights are to the money in the custodian account.

Once a child reaches the magic age, all the money or other assets in a custodial account must be turned over to him or her.

This means that, in most cases, all the money and/or other assets in your child's account must go to the child when he or she turns 21 or 18, depending on the state. (In Maryland, the age is 21.)

Because you must turn over the assets to the child at a fairly young age, these accounts can pose a problem.

Suppose you salt away money in the account for a child's college education, but the child decides not to go to school. Instead, he or she pursues another path (a life of crime, for instance).

What can you do?

John M. McCabe, legislative director for the National Conference of Commissioners on Uniform State Laws, said, "When a minor is a minor no longer ... the custodianship lapses. A custodian has no property rights, and automatically loses control over the assets."

If you don't hand over the assets when required, the child (or his or her guardian) can seek a court order demanding transfer of the assets.

Custodial accounts, sometimes called custodial arrangements, do have advantages.

Depending on the state, the accounts are set up under a Uniform Gifts to Minors Act (UGMA) or a Uniform Transfers to Minors Act (UTMA).

You transfer ownership of cash or other financial assets to minors who are too young to handle them. You name a custodian - you or someone else - to oversee the account. The custodian must run it for the child's benefit.

You generally can set up an account at most banks, credit unions, brokerages, mutual-fund companies and other financial institutions.

Because these accounts are less expensive than trusts, and easier to set up and maintain, they can be a convenient alternative for making gifts of cash or other assets to minors.

These accounts can also offer tax advantages. For instance, whatever income the account earns is generally taxed to the child, who might be in a lower tax bracket than the parent who transfers assets. And a gift to a child might cut the size of the donor's estate, helping to protect the estate from federal estate tax (if the donor isn't also the account's custodian).

Keep in mind, though, that when you put assets in such an account, you make an irrevocable transfer. There are lots of rules and details, too many to list here. For more about custodial accounts, and about trusts and other alternatives, talk to a lawyer or financial adviser. Kaye Thomas, a lawyer and author, has an online guide to custodial accounts for minors at this Web site: www.fairmark.com.

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