Custodial account

A custodial account is an account managed by a parent whose child is under the legal age to trade shares. Permission must be gained from the parent for the child to use the account to trade shares.

Several types of custodial accounts can be opened for minors, bank accounts, mutual fund accounts, but this page will be referring to brokerage accounts.

When a custodial account is opened the child owns the shares in the account. Any withdrawal and investment decisions however are controlled by the parent. Capital gains tax will be charged against the child’s name.

It is also important to note that any asset transfers into a child’s custodial account are irreversible, once a transfer has been made the decision can not be reversed. A parent should also be aware that once a child reaches maturity they will have complete control to do what they please with the assets! A great reason to ensure your child receives a good financial education.

USA custodian accounts

Capital gains tax against a child’s name can be beneficial to a parent in the USA where capital gains and income are taxed as one, as a child will often pay little tax due to a low annual income. Read more about taxation on shares.

Holders of custodian accounts in the USA should be cautious of having assets in their child’s name when apply for college financial aid. Many financial aid programs expect 35% of a child’s assets to be used before applying for a loan compared to only 5% of the parents assets.

The legal age for trading shares

If you are underage and don’t think a custodial account is for you just yet why not practice trading shares for free using virtual money with ADVFN.