Custodial Accounts Offer A Diverse Way to Transfer Wealth to Your Loved Ones
October 15, 2016
Families have choices when it comes to securing their savings for future generations. An option to consider is a Custodial Account. While most people are familiar with the idea of a Trust Fund, Custodial Accounts are similar to Trusts but controlled by an adult on behalf of a minor. The custodian (the organization that holds the assets) of this type of account is bound ethically and legally to act in the best interests of the child. Therefore, the custodian’s approval is mandatory to conduct any transactions, such as buying or selling stocks.
There are two general types of custodial accounts that only differ in the kind of assets you can contribute to each. The Uniform Transfers to Minors Act (UTMA) account holds virtually any type of asset, including real estate, intellectual property, and even works of art. The other is the Uniform Gift to Minors Act (UGMA) accounts, which are limited to financial assets of cash, securities—stocks, bonds, or mutual funds—annuities and insurance policies. Once a minor reaches the legal age of adulthood, in Texas that is any person over the age of 18, control of the account officially transfers from the custodian to the named beneficiary.
Ranelle Hampy, Executive VP-Wealth Management Officer for TGB, tells us that if the account is in the name of the minor upon their 18th birthday, the account becomes his or her property with no paperwork needed to initiate the transfer of funds. Because this happens automatically, the named beneficiary can claim full control and use of the funds as soon as this occurs. In the event that the minor should die before coming of age, the account becomes part of the child’s estate. Keep in mind that because assets within a custodial account transfer to the beneficiary at 18, those assets may limit the amount of financial aid from colleges the recipient is eligible to receive.
A Financial Plan Right for Your Family
Custodial accounts offer an array of opportunities for parents looking to set aside a portion of their earnings for their children, especially since there are no contribution limits to this type of account. It is also a great way to introduce your child to managing investments. You should note that opening a custodial account involves making a gift, which means you might be subject to a gift tax unless a special exclusion applies. However, there are no other differences in the way these accounts are taxed; the income flows to the owner, says Ranelle.
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