Can I Open a Bank Account for a Friend’s Child?

Many individuals consider contributing to the financial future of children in their lives, including friends’ children. While opening a bank account directly for a friend’s child presents challenges due to banking regulations and legal requirements, established financial vehicles exist to help save or gift money to a minor. This article explores common methods, their structure, setup steps, and financial considerations.

Navigating Direct Account Opening

Opening a bank account directly in a minor’s name by someone who is not their legal parent or guardian is generally not permissible. Financial institutions require account holders to possess legal capacity, typically meaning being 18 years old. This ensures proper identification, establishes legal liability, and complies with regulatory frameworks.

When an account is opened for a minor, banks usually require a parent or legal guardian’s involvement. This adult manages the account until the child reaches the age of majority. Consequently, a friend without legal guardianship cannot open a joint account with a child or an account solely in the child’s name. Such direct actions are prevented by legal and procedural safeguards designed to protect minors. However, alternative pathways exist to contribute financially to a child’s future, such as establishing a custodial account or providing funds to the child’s parents.

Custodial Accounts for Minors

Custodial accounts, structured under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), offer a solution for adults to hold and manage assets for a minor. These accounts are legally owned by the minor, meaning the assets irrevocably belong to the child. An adult, designated as the custodian, retains control and management until the minor reaches the age of majority, which varies by state.

The custodian makes investment decisions and distributes funds for the minor’s benefit, such as for education, healthcare, or general welfare. These distributions must directly serve the minor’s needs and cannot be reclaimed by the donor or used for the custodian’s personal expenses. Once the minor reaches the age of majority, the custodian transfers full control of the account to the now-adult child. These accounts allow contributions from various sources, including friends, and funds can be used for any purpose that benefits the child.

Establishing a Custodial Account

Setting up a custodial account involves specific steps and documentation. These accounts can be opened at various financial institutions, including banks, brokerage firms, and mutual fund companies. The designated custodian typically provides personal identification, such as a Social Security number and government-issued ID.

Information about the minor beneficiary is also required, including their legal name, date of birth, and Social Security number. The account is formally opened in the minor’s name “for the benefit of” the minor, with the friend or other adult designated as the custodian. The custodian’s state of residence often determines the age of majority for the account, guiding when the minor gains full control.

Other Avenues for Gifting Funds

While custodial accounts are common, other methods allow a friend to contribute financially to a child’s future. One option is gifting money directly to the child’s parents. Parents can deposit these funds into an existing savings account for their child or use them for other child-related expenses. This offers simplicity and provides parents with direct control.

Another avenue is contributing to a 529 college savings plan. Friends can contribute to an existing 529 plan owned by the child’s parents. Many 529 plans offer gifting platforms that simplify this process. An individual, including a friend, can also open a 529 plan as the account owner and name a friend’s child as the beneficiary. This provides the friend with control over the account and its investments, ensuring funds are directed towards qualified education expenses.

Financial and Tax Considerations

Gifting money to a minor, especially through custodial accounts, has financial and tax implications for both the child and donor. The “kiddie tax” applies to a minor’s unearned income, such as interest, dividends, and capital gains from accounts like UGMA/UTMA. For the 2025 tax year, the first $1,350 of a child’s unearned income is generally tax-free. The next $1,350 is taxed at the child’s marginal rate. Unearned income exceeding $2,700 is subject to the parent’s marginal income tax rate.

This rule prevents parents from shifting income to children in lower tax brackets. For the donor, gifts are subject to federal gift tax rules. Most gifts fall within the annual gift tax exclusion, which for 2025 is $19,000 per recipient. An individual can give up to $19,000 to any number of people annually without incurring gift tax or needing to file a gift tax return.

Married couples can combine their exclusions, allowing a gift of up to $38,000 to one individual. Contributions to 529 plans also count towards this annual exclusion. Once funds are placed into a custodial account or other gift vehicle for a minor, they become the minor’s property and typically cannot be reclaimed by the donor.