Four Custodial Account Types

Establishing custodial accounts can be a tricky endeavor unless you first fully identify your goal for creating the account. Once you know exactly what your purpose is for establishing a custodial account, learning about the types of custodial accounts and how they work can help you make the final choice.


Two types of custodial accounts for minors are the Uniform Gifts to Minors Act (UGMA) adopted in 1956 and the more flexible Uniform Transfers to Minors Act (UTMA) adopted in 1986. Almost every state in the U.S. has adopted the more recent UTMA at this point, but it is often still referred to as UGMA by many people merely because they are in the habit of using that name. The essential principles of both are the same and are designed to guide the permanent gift or transfer of assets to minors.

Revocable Versus Irrevocable Trusts

A trust is also a form of custodial account, but it is not under the guidelines of UGMA or UTMA, and thus provides more flexibility. Trusts can be either revocable, which allows for the contingency that at some point, the assets can be returned to the donor, or an irrevocable trust which means assets cannot be taken back. The main difference between the two other than flexibility is in the tax category. Revocable trusts are not owned by the child whereas an irrevocable trust cannot be returned and therefore is owned by the child.

Coverdell Education Savings Account

The Coverdell Education Savings Account (ESA) is an IRA custodial account, setup and maintained on behalf of a beneficiary, for the purpose of saving to cover educational costs of the beneficiary from elementary through graduate school. Tax free growth of funds occurs until such time as the earnings are withdrawn to cover qualified expenses. As of January 2004, Coverdell ESAís are considered a parental asset and thus are not considered a student asset in determination of financial aid. Creation of custodial accounts generally occurs when the beneficiary is under age 18 and funds must be withdrawn before the beneficiary reaches thirty.

529 Savings Plans

A 529 custodial savings plan is designed to help families save money toward educational costs of a beneficiary and offer a multitude of income tax benefits. Each state may offer tax breaks on top of federal tax breaks, so comparing various state plans will enable you to choose the best plan benefits for you. Ongoing investments are handled by the plan, but funds in the account remain under the control of the donor. Switching beneficiaries is permitted and funds can be returned to you at any point, making this a very flexible way to save for the expenses of college.

After researching the different forms of custodial accounts, in the end you will need to choose the plan that best fits your needs and goals. Itís always advisable to consult an expert to assist you in determining how the restrictions and benefits of each type of account will apply to your financial situation.