Can Minors Own Stocks? How Custodial Accounts Work
Learn how children can legally own investments like stocks. Understand the mechanisms and considerations for setting up accounts for minors.
While direct ownership of investments by a minor presents legal complexities, established mechanisms allow young people to hold various assets. These specialized accounts provide a structured approach for minors to benefit from investments.
Legal Framework for Minors and Investments
Minors generally lack the legal capacity to enter into binding contracts, which is a fundamental requirement for activities like opening brokerage accounts or trading securities. This legal limitation means a minor cannot independently establish an investment account or directly engage in stock transactions. The legal system aims to protect minors from potentially unfavorable agreements.
Because of this incapacity, direct ownership of stocks by a minor is not legally binding. Alternative legal structures are necessary to enable minors to hold investment assets. These structures ensure assets are managed responsibly until the minor reaches legal adulthood.
Custodial Accounts for Minor Stock Ownership
Custodial accounts, primarily established under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), are the main legal vehicles enabling minors to own stocks and other investments. These accounts are opened by an adult, known as the custodian, for the benefit of a minor. The custodian manages the assets within the account, while the minor is the beneficial owner.
The custodian holds a fiduciary duty, managing assets prudently and in the minor’s best interest. UGMA accounts typically allow for gifts of cash and securities such as stocks, bonds, and mutual funds. UTMA accounts offer broader flexibility, permitting a wider range of assets, including real estate, intellectual property, and fine art. To establish an account, the full names, Social Security numbers, and dates of birth for both the minor and custodian are required, along with the custodian’s address.
Tax and Control Considerations
Custodial accounts have specific tax implications, particularly concerning the “Kiddie Tax” rules that apply to unearned income of minors. For 2024, the first $1,300 of a child’s unearned income is tax-free. The next $1,300 is taxed at the child’s own tax rate. Any unearned income exceeding $2,600 for 2024 is taxed at the parent’s marginal federal income tax rate, which is often higher. This rule prevents parents from shifting income to children to exploit lower tax brackets.
The custodian maintains control over the assets in the account until the minor reaches the age of majority, which varies by state and can be 18 or 21, or in some cases up to 25. Once the minor reaches this age, the assets held within the custodial account legally transfer to them, and the custodian’s role concludes. This transfer is mandatory, and the account then becomes fully controlled by the now-adult beneficiary. Assets are irrevocably considered the property of the minor from the moment they are placed in the account.
Establishing a Custodial Account
Opening a custodial account involves selecting an appropriate financial institution, such as a brokerage firm or bank. Factors to consider include the types of investments available and any associated fees.
The application process requires specific documentation, including identification for the custodian and the minor’s Social Security number and date of birth. The application forms will gather necessary personal and banking information. Funding the account can be done through a one-time deposit, recurring transfers, or by transferring existing assets into the account. The custodian is then responsible for managing the investments and ensuring they benefit the minor until the age of majority.