What is Custodial Account?
293 reads · Last updated: December 5, 2024
The term custodial account generally refers to a savings account at a financial institution, mutual fund company, or brokerage firm that an adult controls for a minor (a person under the age of 18 or 21 years, depending on the laws of the state of residence). Approval from the custodian is mandatory for the account to conduct transactions, such as buying or selling securities.In a broader sense, a custodial account can mean any account maintained by a fiduciarily responsible party on behalf of a beneficiary, such as an employer-based retirement account handled for eligible employees by a plan administrator. A fiduciary is bound ethically and legally to act on the best behalf of another's interests.Each state has specific regulations governing the age of majority and the naming of custodians and alternate custodians.
Definition
A custodial account is typically a savings account set up by an adult for a minor (under 18 or 21, depending on state law) at a financial institution, mutual fund company, or brokerage. The custodian's permission is necessary for transactions (such as buying or selling securities) in the account. More broadly, a custodial account can refer to any account maintained by a party with fiduciary responsibility on behalf of a beneficiary.
Origin
The concept of custodial accounts originated from the legal need to manage minors' assets, ensuring that their property is managed by a legally responsible adult until they reach the age of majority. With the development of financial markets, this concept has expanded to include other types of custodianships, such as retirement accounts.
Categories and Features
Custodial accounts are mainly divided into minor custodial accounts and retirement custodial accounts. Minor custodial accounts are typically used for savings and investments until the minor reaches the age of majority. Retirement custodial accounts are managed by plan administrators for eligible employees, ensuring the safety and growth of retirement funds. The key feature of custodial accounts is that they require a custodian to manage them, and the custodian has a legal obligation to act in the best interest of the beneficiary.
Case Studies
Case Study 1: A parent sets up a custodial account at a bank for their 15-year-old child for savings and investments. The parent, as the custodian, manages the funds in the account until the child turns 18. Case Study 2: A company establishes an employer-based retirement custodial account for its employees, managed by a plan administrator to ensure proper management and investment of the employees' retirement savings.
Common Issues
Common issues investors face with custodial accounts include: How to choose the right custodian? Can the custodian be changed at will? Typically, a custodian should have good financial management skills, and changing a custodian requires following legal procedures.
