The Pros & Cons of Custodial Accounts


Lauren Pitman

Author, Attorney

Under the Uniform Transfer to Minors Act (UTMA), which was finalized in 1986 and adopted in almost all 50 states, a minor can receive a gift of assets such as money, a patent, real estate, or fine art without a guardian or a trustee.

In order to use this financial tool, you create a custodial account. What benefits does a custodial account offer? Let’s find out with this pros & cons list:

PRO: Assets transfer directly to the beneficiary without a guardian or a trustee.
Because the account is held by the minor, under their own social security number, there’s no need to worry about transferring the money or having the account go through probate when you die. There are no guardians or trustees, either. The account stays in the minor’s name, and an appointed custodian manages the funds. When the minor comes of age–either 18, 21, or 25, depending on the state–they take control of the account directly.

CON: Custodial accounts don’t have customization or control like a trust.
The worry-free transfer afforded to custodial accounts might not be so easy if the child isn’t as financially savvy at an early age. If you create a savings account for a minor child and die before they come of age, they will automatically own the account when they are of legal age–no strings attached. They could spend the money any way they want. With a trust, you have the option to create a lot more controls. You can choose the exact age they inherit and create parameters about how they can spend it, whether on education, travel, medical expenses, or other expenditures that are important to you.

PRO: Builds tax-free savings for minor children.
With the $15,000 gift tax exemption per person per year, you could create a sizable account for a minor child that would allow them to save money, tax-free. You can also give life insurance, fine art, and other gifts that transfer directly to the minor without incurring a tax penalty, as the account stays in the minor’s social security number.

CON: Unearned income may be subject to a “kiddie tax”.
In a high-yield account, or with a large gift of stocks, unearned income can exceed the standard deduction of $1,100 and be subject to taxes. Any amount above $2,200 is taxed at the guardian’s tax rate, which can be as high as 37%. While the custodial account can be a useful tool, there are limitations that are meant to prevent transferring away wealth to minor children. Be careful when giving large gifts that are meant to prevent overpaying taxes, because they could backfire.

PRO: Funds can provide for a child’s expenses, for everything from college to music lessons.
One benefit of creating a custodial account is that the money is set aside for a child’s benefit. Even while they’re under the age of majority, the custodian can use the money in this account to pay for the child’s summer camp or music lessons. It’s a great tool for providing for a loved one’s needs.

CON: Custodial accounts count against a student applying for financial aid.
Because the account is held by the minor, under their own social security number, it will need to be counted by FAFSA as part of the child’s financial aid considerations. This could potentially impact the child’s ability to receive federal funding to pay for college, depending on the size of the assets.

PRO: A custodian can continue to manage the account after the child reaches the age of majority–as long as they have permission.
Some people might not be tempted by coming into a large sum of money at age 18 or 21, and they can opt to keep the custodian on the account, helping them to make decisions about the funds. A good attorney could help write these specific ideas into your estate plan, so the child knows it’s an option, and what your recommendations are for the fund or gifts.

The UTMA is a beneficial financial tool for many people, and it can help to save money. While it could be beneficial to create a trust, depending on your state, it might be easier to use tools such as beneficiary designations and custodial accounts to ensure that all your beneficiaries are receiving the gifts you wanted to give, along with the tax benefits.

In order to decide if a custodial account is right for your situation, you’ll want to consult a knowledgeable attorney, your financial advisor, and anyone who knows the child personally. After all, if you’re unsure of the maturity of your beneficiary, setting up a trust might be the right decision because it offers a chance for training wheels. Money can be given in multiple installments or at a higher age than 18 or 21.

Consider all the options: a custodial account might make your tax burden a little lighter and your beneficiaries’ lives a little easier. Check out more important information and products at


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Disclaimer: The information contained in this article should not be considered tax or legal advice and is not a substitute for such advice. State and federal laws change frequently and the information in this article may not reflect your own state's laws or the most recent changes in state or federal law. For current tax and legal advice, please consult with an accountant or attorney licensed to practice in your state.

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