Custodial Accounts

If you want to give a minor a gift of investments or cash, opening a custodial account may be one solution. A custodial account is managed by a custodian on behalf of a minor who is the account owner. These accounts hold assets the custodian use for various reasons as long as the minor benefits from the use of the funds.

What is a custodial account?

A custodial account can be opened for and to benefit a minor, typically a person under the age of 18 or 21 depending upon the applicable state law. This account is controlled by an adult who serves as the custodian until the minor reaches the age of termination (typically 18 or 21, but some state laws allow an older age).

With each custodial account, only one minor can be named as account owner/“beneficiary” and in the majority of states only one adult may act as the “custodian.” Funds in a custodial account are set aside solely for the benefit of the account owner/beneficiary. This type of account can be used to give minors investments or cash and are often used to build assets on behalf of the minor, especially to have them available to pay for their college expenses. Only the custodian can make investment decisions. This person can’t be changed unless they resign or become incapacitated, or a change is made by a court order.
 

Account Owner/Beneficiary Custodian
Minor (typically until 18 or 21, but some state laws allow an older age)Adult
Funds for their benefitApproves decisions
Account transfers to them upon reaching age of termination (typically 18 or 21, but some state laws allow an older age) or to their estate if the minor passes away prior to termination.Typically cannot be changed unless resigns, becomes incapacitated, dies, or by a court order

Contributions to a custodial account can be made by anyone, and there are no contribution limits. As with other cash gifts, there is an annual federal gift tax exclusion amount of $17,000 per contributor, per beneficiary ($34,000 for a married couple).

How can a custodial account be used?

Custodial accounts can hold gifts of cash or investments from parents, grandparents and other adults. Once the gift is made, the donor/transferor gives up all rights to the assets, the minor becomes the owner and the gift may not be revoked or changed.

Funds in an account like this must be used to benefit the minor. This may include paying for summer camp or equipment needed for extracurricular activities. Assets may also be used to cover school tuition.

Why set up a custodial account?

A custodial account can be used to give a minor a gift of investments or cash that can be used for many different expenses to the benefit of the minor. Traditionally, custodial accounts have been used to save money for future college costs; however, as long as assets are used for the minor’s benefit, they can potentially be used in many different ways (summer camps, training, dental expenses and more) depending upon the specific situation and request.

There are considerations to keep in mind when opening a custodial account to hold assets for the minor's future college expenses as these assets may impact a minor’s eligibility for financial aid. Student and parental assets as well as income are considered when applying for financial aid. Because a custodial account is considered an asset of the minor, it may reduce financial aid eligibility. You should discuss the potential financial aid implications with a financial aid professional.

A custodial account has advantages. To start, there aren’t contribution limits, but similar to other cash gifts, there is an annual federal gift tax exclusion amount of $17,000 per contributor, per beneficiary ($34,000 for a married couple). There’s flexibility in how the funds are used as long as they are used to benefit the account owner. Unlike other types of accounts for minors such as 529 education savings plans, there aren’t restrictions on the number of investment changes and custodial accounts have an array of investment options.

Find an Edward Jones Financial Advisor to work with you to set up a custodial account.

Custodial accounts and taxes

Investment income from a custodial account, including any gains from assets sold within the account, is taxable in any given year. Unearned income may be subject to the “kiddie tax,” which means that a portion of the child’s unearned income is generally taxed at the parents’ marginal rates. This will affect dependent children up to age 18. This also applies to children between the ages of 19 and 23, if the child is a full-time student when certain other criteria apply. A qualified tax professional can assist you in determining how a custodial account could affect your situation.

Custodial account frequently asked questions

How do I set up a custodial account?

A custodial account can be useful, especially if you want to give a minor investments or cash to use for their benefit. Overseen by an adult who acts as the custodian of the account, the assets in a custodial account must be used to benefit the minor account owner.

To set up a custodial account, you may want to work with a financial advisor. Find an Edward Jones Financial Advisor to work with you to set up a custodial account.

Important Information:

Edward Jones, its employees and financial advisors cannot provide tax or legal advice. This content should not be depended upon for other than broadly informational purposes. You should consult your attorney or qualified tax advisor regarding your situation. Specific questions should be referred to a qualified tax professional.