A custodial account means an account created by a person on behalf of someone else. For instance, a savings account created by a parent for his/her minor child is a custodial account. A custodial account is often created for the benefit of a minor. Generally the custodian of a custodial account will be the parent or legal guardian. But, where the parents are unavailable, the custodian will be any individual who was pre-selected by the parents or is appointed by the courts. In some situations, a custodian can be an agent, bank, trust company, or other organization. Such custodians are appointed in accordance with the applicable law of the state.
A custodial account can be set up in the name of a child either with a bank or securities company. The investments to a custodial account are made in the form of mutual funds or other similar products offered by regulated investment companies. A minor in whose name a custodial account is created cannot transact the securities without the permission of the custodian. Hence, until the child reaches the age of majority, the financial resources under a custodial account will be handled by a custodian. Custodial accounts are considered an excellent way of providing future assets to minor children.
The purpose of a custodial account is:
(1)to ensure the availability of financial resources sufficient to meet the needs of the child during adolescence; and
(2)to ensure a financial base allowing the child to pursue a higher education after high school, or to launch a business.