What Happens to a Custodial Account When the Child Turns 18?
When a minor with a custodial account comes of age, the transfer of control is a formal process with specific legal and financial steps for the custodian.
Custodial accounts are a financial tool used by adults to hold and manage assets for a minor. Governed by either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), they provide a way to make irrevocable gifts without a formal trust. The defining feature is the mandatory transfer of control from the custodian to the beneficiary. This transfer occurs when the child reaches a specific age, at which point they gain full legal ownership of the assets.
Determining the Age of Account Termination
The specific moment a beneficiary gains control of a custodial account is known as the age of termination. This age is not uniform; it is dictated by the laws of the state where the account was established and the type of account. Accounts created under the Uniform Gifts to Minors Act (UGMA) terminate when the beneficiary turns 18.
The Uniform Transfers to Minors Act (UTMA) provides more flexibility, often allowing for a later age of termination, such as 21 or, in some states, as late as 25. To confirm the exact age, the custodian must refer to the original account agreement documents, which specify the governing state law and designated age. If the documents are unavailable, contacting the financial institution is the next step, as they can provide the necessary details.
Preparing for the Account Handover
As the beneficiary approaches the age of termination, the custodian should prepare for a smooth transition. This involves contacting the bank or brokerage firm to request the forms needed to re-register the account in the new owner’s name. The custodian’s final duties include ensuring all account records are in order.
Preparing a final statement that summarizes the account’s history of contributions, earnings, and expenses is a good practice, though a formal accounting is rarely required. Before the transfer, the custodian must collect the beneficiary’s Social Security number, current residential address, and a copy of a valid government-issued photo ID.
The Process of Transferring Account Control
After the beneficiary reaches the age of termination, the custodian submits the completed re-registration paperwork to the financial institution. This can be done by mail, online, or in person, but not before the beneficiary’s birthday that triggers the termination. Upon receiving the instructions, the institution will restrict account access, suspending services like automatic payments.
The beneficiary must then sign the necessary forms and establish their own login credentials to assume control. The financial institution then officially removes the custodian’s name, re-registers the assets to the new owner, and issues a confirmation statement. If the beneficiary does not provide instructions within a timeframe like 90 days, the institution may automatically re-register the account, but access remains restricted until the forms are completed.
Financial Considerations After the Transfer
Tax Implications
The transfer of assets from a custodial account to the new owner is not a taxable event. The tax detail for the new owner to understand is the concept of cost basis. The original cost basis of the assets—the price paid for them—carries over to the new owner.
Tax implications only arise when the new owner decides to sell any of the assets. For example, if stock purchased for $5,000 is now worth $15,000, the cost basis is $5,000. If the new owner sells the stock, they will have a taxable capital gain of $10,000, with the tax rate depending on how long the asset was held and the owner’s income level.
Impact on Financial Aid
The transfer of ownership impacts eligibility for college financial aid. When applying for aid using the Free Application for Federal Student Aid (FAFSA), the assets in a custodial account are reported as the student’s asset. Student assets are assessed at a much higher rate than parental assets in the aid calculation formula.
Once the account is legally in the student’s name, it continues to be weighted heavily. The FAFSA formula assesses student assets at a rate of 20%, meaning for every $10,000 in the account, the Student Aid Index (SAI) could increase by $2,000, reducing aid eligibility. This is a substantial difference compared to parental assets, which are assessed at a maximum rate of 5.64%.