Custodial Account: Definition, Benefits, and How It Works

What Is a Custodial Account?

A custodial account is a financial account that an adult opens and manages on behalf of a minor. Popular with parents and grandparents, these accounts let you gift cash, stocks, mutual funds, or even real estate while maintaining control of the assets until the child reaches the "age of majority"—usually 18 or 21, depending on state law.

Custodial accounts are governed by two key statutes: the Uniform Gifts to Minors Act (UGMA) and the newer Uniform Transfers to Minors Act (UTMA). UGMA allows transfers of securities, while UTMA extends the list to almost any type of property, making it a flexible estate-planning and gifting vehicle.

How Does a Custodial Account Work?

The adult, known as the custodian, opens the account in the child’s name at a brokerage, bank, or credit union. All contributions are irrevocable gifts—once money or property is deposited, it belongs to the minor. The custodian manages investments, executes trades, and can withdraw funds, but every action must be for the beneficiary’s benefit, such as education, medical expenses, or extracurricular activities.

When the child reaches the statutory age, control automatically transfers, and the young adult can use the assets without restriction. No additional legal paperwork is required.

Types of Custodial Accounts

• UGMA: Limited to financial assets like stocks, bonds, and mutual funds.
• UTMA: Covers UGMA assets plus real estate, patents, fine art, and other tangible property.

Key Benefits

Ease of setup: Opening an account is as simple as filling out an online form.

Tax advantages: The first $1,250 of unearned income may be tax-free; the next $1,250 is taxed at the child’s lower rate, potentially reducing the family’s overall tax burden.

Flexibility: Unlike 529 plans, custodial accounts impose no restrictions on future spending once the child gains control.

Important Considerations

Because assets legally belong to the minor, they can reduce financial-aid eligibility under FAFSA’s asset calculations. Additionally, contributions are irrevocable, so you cannot take the money back if circumstances change.

Bottom Line

Custodial accounts are a straightforward way to transfer wealth, teach investing basics, and give children a financial head start. By understanding the rules and planning strategically, you can leverage UGMA or UTMA accounts to meet both educational and long-term gifting goals.