Can You Close a Custodial Account? Here’s How

Custodial accounts, such as Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts, serve as investment vehicles designed to hold assets for a minor’s benefit. Adults typically establish these accounts to save for a child’s future. While intended for long-term use, specific circumstances permit closure before the beneficiary reaches adulthood. Understanding these conditions and the subsequent procedures is important for custodians and beneficiaries.

Conditions for Account Closure

A primary reason for closing a custodial account is the beneficiary reaching the age of majority. This age varies by state, typically falling between 18 and 21 years, though some state laws allow for an extension up to age 25 if specified at account creation. Upon reaching this milestone, the custodianship automatically ends, and the assets transfer directly into the beneficiary’s control. The former minor then gains full legal ownership and discretion over the funds.

The death of the beneficiary before reaching the age of majority also necessitates account closure. The custodial account’s assets are considered part of the minor’s estate. Distribution then proceeds according to applicable state probate laws and any existing estate plan, ensuring orderly transfer to legal heirs.

The death or incapacitation of the custodian also triggers a need for action regarding the account. Many custodial accounts allow for the designation of a successor custodian at establishment or later. If a successor is named, that individual assumes responsibility for managing the account. If no successor was designated, or if unable to serve, legal steps, often a court order, may be necessary to appoint a new custodian.

A court order may mandate the closure of a custodial account. This typically occurs due to a custodian’s breach of fiduciary duty, such as improper use or mismanagement of funds. Custodial assets must be used exclusively “for the use and benefit of the minor.” Failure to adhere to this principle can lead to judicial intervention, safeguarding the minor’s assets.

The Closure Process

Once conditions for closing a custodial account are met, begin by contacting the financial institution holding the account. This initial outreach is essential to understand their specific requirements and obtain necessary forms. Each institution has a defined process for account terminations, and their guidance is invaluable.

The financial institution requires specific documentation to verify the closure request. Common documents include identification for both the custodian and beneficiary, such as a driver’s license or other government-issued ID. For beneficiaries reaching the age of majority, proof of age, like a birth certificate or valid identification, is required. If closure is due to death, an official death certificate for the deceased custodian or beneficiary is mandatory.

If a court order mandates closure, provide a certified copy of the court’s decree to the financial institution. The institution will supply account closure forms, which must be accurately completed. These forms may include a “Custodial Beneficiary Conversion Account Application” or a “Custodial Account Beneficiary Distribution Form,” depending on the desired outcome.

After submitting all required documentation and completed forms, the financial institution undertakes verification. This process confirms the authenticity of documents and identities. Some institutions may require a Medallion Signature Guarantee (MSG) stamp for certain transactions, especially with name changes or significant asset transfers. The closure timeline varies, typically from a few business days to several weeks, depending on complexity and processing times.

Asset Transfer and Tax Considerations

Upon closure of a custodial account, assets are transferred to the beneficiary. This can occur via direct transfer of investments to a new individual account at the same or a different financial institution. Alternatively, assets may be liquidated, and funds distributed as a check or electronic transfer. The transfer method is usually determined by the beneficiary’s preference and the financial institution’s options.

Income and capital gains generated within a custodial account up to closure are considered the beneficiary’s income for tax purposes. The beneficiary is responsible for paying taxes on interest, dividends, or capital gains realized from the account’s investments. Financial institutions issue tax forms, such as Form 1099-B, Form 1099-DIV, and Form 1099-INT, to report these earnings.

The “kiddie tax” rules can apply to unearned income generated by a custodial account. These rules prevent higher-income individuals from shifting investment income to children to take advantage of lower tax brackets. The kiddie tax applies to children under age 18 at year-end, or full-time students aged 19 to 23.

For 2025, the first $1,350 of a child’s unearned income is tax-free. The next $1,350 of unearned income is taxed at the child’s lower rate. Unearned income exceeding $2,700 for 2025 is taxed at the parents’ marginal rate.

The beneficiary, or their parents, must report this income on their tax return, potentially using IRS Form 8615 if income exceeds certain thresholds. Alternatively, parents may elect to include the child’s interest and dividend income on their own tax return using IRS Form 8814.