Custodial account


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Custodial Account

An account at a bank, brokerage, or insurance company held by an adult guardian on behalf of a minor child. That is, the minor child owns the custodial account, but the parent or guardian manages it and makes all decisions related to it. The child takes control of the account at a certain age: 18, 21, or 25, depending on the jurisdiction. Importantly, the account is taxed at the guardian's marginal tax rate until the child turns 18, at which point it is taxed at the child's rate.

Custodial account.

If you want to make investments on a minor's behalf, or transfer property you own to that person, you can open a custodial account with a bank, brokerage firm, mutual fund company, or insurance company.

You name an adult custodian for the account -- either yourself or someone else -- who is responsible for managing the account until the child reaches the age of majority.

That age may be 18, 21, or 25 depending on the state and the type of account you choose. At majority, the child has the legal right to control the account and use the assets as he or she chooses.

There may be some tax advantages in transferring assets to a minor. If the child is under 18, investment earnings above a specific level that Congress sets each year are taxed at the parents' marginal tax rate.

But if the child is 18 or older, all investment earnings are taxed at the child's rate -- again, typically the lowest rate. In addition, gifts you make to the account are no longer part of your estate, which may reduce vulnerability to estate taxes. However, it's wise to review your plans with your legal and tax advisers.

One drawback of a custodial account is that the assets are considered the property of the child, and may reduce the amount of financial aid the child qualifies for when he or she enrolls in a college or university.

References in periodicals archive ?
Many of those exchanges in recent years went from higher, cost annuity contracts into mutual-fund custodial accounts, or 403(b)(7)s, Baum said.
I converted my daughters' custodial accounts to 529 plans and contribute monthly to non-custodial 529's because I maintain ownership and get tremendous tax advantages.
Question--May there be one custodial account for two or more minors?
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State and local governments that do not currently use trust, annuity contracts, or custodial accounts will need to establish one or more of these investment vehicles.
Many funds reduce their minimum initial investment for a custodial account @one in which you control the money for the child).
Requirement that custodial bank confirm in writing receipt, substitution and release of securities to and from custodial account.
Following a mortgage refinancing, however, the servicer will hold the unpaid principal balance of the extinguished mortgage loan--an amount perhaps 10 to 100 (or more) times as large as the homeowner's regular monthly principal payment--in a custodial account for a much longer period, often two to six weeks.
In a properly structured custodial account, your assets will be protected from fraud, embezzlement and theft.
Ideally, the treatment of assets should be looked at holistically across all of the accounts in a client's portfolio, not just a single custodial account.
The exemptions are not available if a participant-directed 403(b)(7) custodial account invests in a group trust.
introduced the ING Global Perspectives Fund within its Variable Universal Life (VUL) insurance and ING Select Advantage IRA ("Select Advantage") mutual fund custodial account products.