Can a Grandparent Open a Bank Account for a Child?

Grandparents often consider various strategies to contribute to their grandchildren’s financial future. Establishing a bank account provides a practical and straightforward method for setting aside funds. This approach can help accumulate resources for future needs such as higher education or a first car, while also offering an opportunity to introduce financial concepts to younger generations. Many financial institutions offer account options specifically designed for minors, making it a viable choice for grandparents wishing to provide a financial head start.

Understanding Account Types for Minors

Grandparents have several options for bank accounts for a grandchild, each with distinct characteristics regarding ownership and control. Understanding these differences is important for selecting the most suitable type.

Custodial accounts, established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), allow an adult, such as a grandparent, to manage assets for a minor. The grandparent acts as the custodian, and the child is the beneficiary. Funds are irrevocable gifts, legally belonging to the child, though the custodian controls them until the child reaches the age of majority, typically 18 or 21 depending on the state. UTMA accounts offer more flexibility than UGMA, allowing for a broader range of assets beyond cash and securities.

Another option is a joint account, where the grandparent and child are co-owners. This structure provides shared access and control over the funds. While it offers immediate involvement for the child, the grandparent’s name remains on the account, and both parties have withdrawal privileges.

Savings accounts opened in the child’s name often require an adult co-signer or custodian. These accounts differ from joint accounts in that the child is usually the primary account holder, with the adult primarily serving to satisfy legal requirements for minors to hold an account. This arrangement allows the child to begin learning about banking while still under adult supervision.

Trust accounts represent a more complex option, where a bank account is held by a trust established for the child’s benefit. This involves legal setup and the appointment of a trustee to manage the funds according to the trust’s terms. While providing extensive control over how and when funds are distributed, establishing a formal trust can be more involved and costly than other account types.

Steps to Open an Account

Opening a bank account for a minor involves specific procedures and documentation. The process requires information and identification for both the grandparent and the grandchild.

The grandparent needs to provide a valid government-issued identification (e.g., driver’s license or passport), Social Security Number (SSN), and proof of address. For the child, an SSN or Individual Taxpayer Identification Number (ITIN) is required, often with a birth certificate to verify age and identity. Some banks may also request a minor’s photograph.

When choosing a financial institution, consider account fees, interest rates, and the convenience of branch locations or online banking. Some banks may require the grandparent to already have an account with them. The application process is often initiated in person at a bank branch, though some institutions offer online options for certain account types.

Specific titling is used for accounts. For a custodial account, the title reflects the grandparent as custodian for the child (e.g., “Grandparent Name, as Custodian for Child Name under the [State] Uniform Transfers to Minors Act”). For joint accounts, both names are listed. Accurately completing the necessary forms is a final step.

Account Management and Contributions

Once a bank account for a minor is established, understanding the ongoing management and contribution rules is important. Control of funds varies significantly by account type.

In UGMA or UTMA accounts, the grandparent, as custodian, retains legal control over assets. The custodian manages funds and makes investment decisions for the minor’s benefit. For joint accounts, both the grandparent and child share access and control. For trust accounts, the appointed trustee manages funds according to the trust’s terms.

Contributions can be made through direct deposits, electronic transfers, or checks. Grandparents, parents, or other relatives can add funds, allowing consistent saving for the child’s future. There are no annual contribution limits for UGMA/UTMA accounts, though gift tax considerations may apply to larger contributions.

Withdrawal rules for custodial accounts specify funds must be used “for the benefit of the minor,” covering expenses like education, healthcare, or general welfare. The custodian decides on withdrawal appropriateness; the child cannot make independent withdrawals until reaching the age of majority. Upon reaching this age (usually 18 or 21), control formally transfers to the child, who can then use the money for any purpose.

Tax Implications

Establishing a bank account for a grandchild also involves understanding potential tax implications for both the grandparent and the child. These considerations primarily relate to gift tax and income tax on earnings.

Contributions from a grandparent to a child’s account may be considered gifts. The IRS provides an annual gift tax exclusion, $18,000 per donor per recipient for 2024. Contributions within this limit do not require filing a gift tax return (Form 709) and do not count against the donor’s lifetime gift tax exemption. If contributions exceed this exclusion, the grandparent must file Form 709, though actual gift tax liability arises only if the substantial lifetime exemption is also exceeded.

Interest, dividends, or capital gains earned within the child’s bank account are generally taxable income to the child. However, the “Kiddie Tax” may apply to a child’s unearned income. For 2024, the first $1,300 of a child’s unearned income is tax-free, and the next $1,300 is taxed at the child’s lower rate. Unearned income exceeding $2,600 for 2024 is subject to the parent’s higher marginal income tax rate.

Financial institutions issue Form 1099-INT for interest income. The child or their parent may need to report this income on a tax return. Parents can sometimes elect to include the child’s interest and dividend income on their own tax return if certain conditions are met, such as the child’s gross income being below a specific threshold and consisting solely of interest and dividends. This can simplify filing but might impact the parent’s tax liability.