Custodial Account for a Child
A custodial account can be opened at any brokerage firm, mutual fund company or bank. Each financial institution, have their own requirements, regarding opening balance requirements and fees charges. According to Internal Revenue Tax Service (2005), anyone can annual give up to $11,000 per person, without incurring any tax liability or paying any gift tax, upon money received. This permits anyone, contributing to a custodial account, including relatives and friends. Anytime, the custodian can resign, but must provide, written notice to the child, if he or she, has reached the age of 14 years old. The transfer of succession will be to a new custodian. The custodian should provide the name of a successor, in case of death. If a successor is not named, then a court judge, will have to appoint a Conservator. This person will manage the custodial account, until the child reaches a specified age. A financial advisor or licensed broker, could best outline, various investments for a custodial account.
There are many advantages opening a custodial account. In 2005, a child under the age of 14, which has income under $1,600 per year, from assets including a custodial account, has to a pay ‘kiddie tax” or child’s rate, which is a preferential rate. Any amount, above $1,600 will be taxed, at the rate of the parent. The custodian of the account may use the account funds, to pay any State or Federal Income Tax that is due. There is no limited maximum amount contributes, to a custodial account, each year. In 2005, estates valued over $1.5 Million (Over 2 million in 2006, 2007 and 2008), required to pay federal income tax. Excellent method, reducing the value of an estate by avoiding or limiting estate Federal Income Taxes, by making contributions to a custodial account, over a period of many years. During a divorce or separation, the custodial account is not accessible to any parent or guardian, except the child, upon reaching a certain age.
A custodial account has some disadvantages. When the beneficiary reaches a specified age, the funds or assets in the account can be spend or utilized, for anything. Hopefully, the person is mature enough, understanding how to best use, the financial gain. Unfortunately, sometimes money in a custodial account will not be utilized, for the original intended purpose or foolishly squandered. Parents intentions to equally provide for their children, becomes a difficulty issue, when the first child has custodial account, and the second child or more, born years later, may not have the same equal amount of funds, in the account. Also, more difficult funding two or more custodial accounts. An alternative solution, contribute a smaller amount to each account. Unfortunately, if the child dies before receiving the account, then the assets are passed to the recipient(s), according to the law of your State, which unfortunately may not be agreeable, especially if there are siblings. When child reaches the age of 18 years old, a ‘Will’ can be prepared, naming the individuals to receive his or her assets, including any custodial account. Certainly, minor changes in a ‘Will’ can be made, by adding a codicil. However, a trust fund, has written stipulation, in case the beneficiary dies, before being able to claim any funds. The recipient of a custodial account will have a difficult time, trying to get eligibility, for any financial aid. The account is considered a financial asset. Keeping in mind, funds in a custodial account may not be received, for many years or prior to applying, for any financial aid, when planning to attend a college or University. During the time, a custodial account is being funded by a parent or guardian, neither one can change their minds, by revoking the account or change the name of the beneficiary, to another child’s name. Any money or assets, already contributed will go to the beneficiary, regardless if the account has stopped receiving funds. Taking any money or assets out of a custodial account, for any reason, before the recipient can claim the assets, is a criminal act, and can be prosecuted. As well, the recipient of the account is not permitted, offering permission, withdrawing funds, to provide any financial assistance to the custodian or for any other reason, until reaching the specified age. When the beneficiary of a custodial account, starts withdrawing funds, will have to pay Federal Income Tax.
The recipient of a custodial account has certain legal rights. Any time, the recipient can petition a court, for an ‘accounting.” During this process, the custodian must show, how the assets are being preserved, invested wisely or benefiting the beneficiary. If any assets in a custodial account are misappropriated, than the custodian of the account, could be held legally liable, up to the difference or loss amount, and replaced by a new custodian. If the recipient is under fourteen years old, an adult needs to file a petition with the court, on behalf of the child. Within any court procedures, an attorney should be hired, for legal advise. Do not misunderstand, that sometimes bad investment decisions are made, without the intention to cause any misappropriation or unintentional financial loss
Best time to open a custodial account, when your child is born and has social security number. The intention should be to fund the account, over a period of many years. The maximum benefits, provide a steady amount of funding each year or averaging amount deposited, and financially safe investments.
