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Custodial Accounts

Chris Farrell Jan 2, 2008

Question: I opened brokerage accounts for my 16 and 17 year old girls last year. I am the custodian for these accounts and the daughters had and still don’t have any idea about these accounts. The older is now 18. A month ago I called the brokerage firm and requested that these accounts to be closed, but was told these type of accounts once opened, cannot be closed…. Can you advice? Thank you: AbdelFatah

Answer: There are two kinds of custodial accounts that go by the acronyms UGMA and and UTMA. The initials stand for Uniform Gift to Minors Act and Uniform Transfer to Minors Act. In essence, the two accounts are very similar although the rules are more flexible with the UTMA. Both accounts allow a child or minor to own securities. You–the adult–controls the account, but the child owns the assets. You can’t take the money back or change your mind. It’s their money, and they take control of the account once they reach age 18 or 21, depending on the state.

You can find a comprehensive review of the rules at www.fairmark.com/custacct/index.htm

Over the years, I’ve taken a lot of calls from parents regretting setting up an UGMA or UTMA. And the reason is usually the same: The realization that it’s the child’s money. You may have set it aside for college (a very common reason), but your child may want to buy a car with it.

However, I’ve also become convinced that the problem, while real, is exaggerated. For instance, most children going to college are well aware of the steep price tag and they’re more than willing to contribute more than their fair share when it comes to finances.

No, I’ve learned that the real problem is often not talking to your children about money set aside in their name. I think it’s important for you to discuss the accounts with your daughters. Tell them why you set aside the money in their name. Discuss your expectations. Listen to their ideas. Engage them in your finances and money expectations. I bet you’ll be satisfied with the outcome.

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