Custodial account

A custodial account lets an adult invest money for a child who cannot legally open a brokerage account. The account is opened under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), depending on the state. One custodian manages the account for one minor, and the account is registered in the minor's name with the minor's Social Security number.

Every deposit into a custodial account is an irrevocable gift — once assets go in, they belong to the minor and cannot be taken back. The custodian has a fiduciary duty to invest prudently for the minor's benefit and cannot use the assets for their own purposes. Because the minor owns the assets, any investment income is taxed to the minor, though unearned income above certain thresholds may be taxed at the parents' rate under the so-called kiddie tax rules.

When the minor reaches the age of majority (often 18 for UGMA and up to 21 or later for UTMA, varying by state), the account transfers to their sole control. UTMA accounts also permit a broader range of property — including real estate — while UGMA accounts are generally limited to financial assets like cash and securities.

Custodial accounts are a staple of the securities licensing exams. The SIE, Series 6, and Series 66 exams all test the rules: one custodian per account, gifts are irrevocable, no margin trading, and the custodian may not grant trading authority to others. Expect questions comparing custodial accounts with education-focused alternatives like 529 plans and Coverdell ESAs.