Custodial Account vs. Guardian Account
Custodial and guardian accounts are similar, but have a few major legal differences. The primary creators of both accounts are often parents or grandparents of the account owner, who is known as the beneficiary. Custodial accounts are available at most banks and credit unions for parental control of their minor children's accounts. Guardian accounts are also for those unable to manage their funds, but require a court order to create.
Parents, grandparents and family members set up these accounts for minor children. Once the child reaches the age of 18 or the legal age of majority in your state, the account becomes hers alone. Often established for a child's future educational costs, these accounts offer some tax advantages, with IRS regulations allowing both the child and custodian to exempt some earnings on the account, up to a specified amount.
These accounts apply to people, either minors or adults, who, by reason of mental or physical incapacity, are unable to manage their money. To open a guardian account, you'll need a court order to present to the bank or credit union. The court document should also contain the court's specific instructions concerning the management of the account and its funds. The court issuing the order will also monitor your account management to ensure that you follow their legal instructions.
Neither Account Is Forever
Custodial accounts terminate when the minor child reaches the age of majority, typically age 18 to 21. Guardian accounts terminate upon an order of the court or, in the case of a minor, when the child reaches state-defined majority. Most guardian accounts also require you to prepare and deliver periodic reports, displaying account activity, to the court. Custodial accounts offer you more flexibility and discretion about how you make deposits or withdrawals, since no legal supervision is involved.
Since the minor child or beneficiary of the account is the legal owner, you have a fiduciary responsibility as custodian or guardian to act in the best interests of the owner and beneficiary. All transactions should be made for the benefit of the account owner, not the custodian or guardian. Although a custodial account offers flexibility of account management decisions that a guardian account does not permit, both accounts legally require actions that help the beneficiary.
Uniform Gift to Minors Act
The Uniform Gift to Minors Act and the similar Uniform Transfer to Minors Act both establish the legality of custodial accounts. Since minors lack the ability to make enforceable contracts, most states prohibit minors from owning assets, such as stocks, bonds, mutual funds or life insurance policies. The UGMA and UTMA allow parents and grandparents to establish custodial accounts without the need to set up an expensive legal trust. Custodians can use financial institutions for cash accounts, or licensed investment brokers if the account includes stocks, mutual funds or other investments.