Banks and other financial institutions make it fairly easy to open a custodial account for your child, grandchild, niece, nephew or a family friend who's a minor. Typically all you need is the child's name, Social Security number and current address. Many who open custodial accounts do not realize that any funds you deposit belong to that child forever. However, you can close a custodial account and give the child the proceeds or open another account.
Custodial Account Defined
A custodial account is an account at a financial institution that you establish as a parent, legal guardian or other custodian for the benefit of a minor. You establish custodial accounts under your state's version of the Uniform Transfers to Minors Act, or UTMA, or the Uniform Gift to Minors Act, or UGMA. Many states now use only UTMA rules, which supersede UGMA rules. Any money you place in custodial accounts become irrevocable gifts to the minors.
You continue to control the funds and direct the funds for the child's benefit until the child reaches 18, 21 or 25 years of age, depending on the age set by your state. Once your child reaches the correct age, your role as custodian ceases and he has full access to the funds to do with as he desires.
Opening a Custodial Account
To open a custodial account for a child, you do not complete trust agreements or other legal documents -- you simply complete paperwork for a custodial account at the financial institution of your choice. However, if you will use UTMA custodial accounts to hold real estate or limited partnership interests, you may need to consult with an attorney to set up the account.
Closing an Account
You can close a custodial account and suffer no repercussions if you give the funds to the child or transfer them into another account for the child’s benefit. You can close a custodial account and transfer funds to an education savings plan, for example, a 529 plan. You can set up a trust and transfer the monies from the custodial account into the trust. You can close the custodial account and establish a regular account at your bank or brokerage firm with the child as the sole beneficiary. The funds are still for her benefit and so she has no legal basis to sue you.
Some Reasons for Closing
One of the primary reasons you may want to close a custodial account is because you believe the child will not handle a large sum of money responsibly. Another major reason is that large sums of money in the child's name may eliminate or reduce his eligibility for financial aid from a college.
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