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Definition / Meaning of

Custodial Account

Categories: Mutual Funds, Banking, Brokerages,

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.