Guardian accounts and custodial accounts are two forms of financial accounts in which one person--the guardian or custodian--manages the account funds for the benefit of another person. Guardian accounts must start with formal court action naming a legal guardian, who then manages the money for the benefit of someone known as the "ward." Custodial accounts are typically opened by parents on behalf of their children, although there are other types of custodial accounts as well.
A custodial account is a bank or other financial account that a person opens for the benefit of another person, called the beneficiary. The person who opens the account is often the "custodian" -- the person who manages the account -- although it's also possible to name a third party as custodian. The money in the bank account is legally the property of the beneficiary, and the custodian has a fiduciary duty to manage the funds in the beneficiary's interest.
UTMA and Coverdell Accounts
Two common types of custodial accounts allow parents or other family members to manage money on behalf of children. Uniform Transfers to Minors Act accounts -- known as Uniform Gifts to Minors Act accounts in some states -- allow relatives to open custodial savings accounts for minor children. The money within the account belongs to the child, and any interest earned by the account is income to the child and taxed at his or her income tax level. Although the parent or other custodian can add and withdraw funds at will, he or she has a fiduciary responsibility to manage the funds in the child's interest. The custodian is relieved of his duties when the beneficiary turns 21. A Coverdell Education Savings Account is a custodial account which may be opened for any child under 18, and which has distinct tax advantages. Although restrictions apply on the amount of money that can be deposited, interest on these accounts remains tax-free if the money is used before the child is 30 for qualifying educational purposes.
Other Types of Custodial Accounts
Custodial accounts are often used in business situations where funds are being held in escrow or accumulated to be paid to another party. Mortgage companies usually require the homeowner to set up a custodial account into which funds are deposited for the mortgage payment and to escrow for property taxes, homeowner's insurance and other expenses.
A guardian is a person formally appointed by a court to be legally responsible for another individual, referred to as a "ward." A court may appoint a guardian for a child or an adult with disabilities who cannot manage his or her own affairs. Guardianships can be temporary or permanent, and may be limited to management of certain aspects of the ward's life, such as her medical care or finances. The guardian must gather the ward's assets together and place any financial assets into distinct accounts that are not held jointly with any other person. Guardian bank accounts must be clearly titled as being held by the guardian for the ward.
Custodial accounts are not generally subject to court review unless a beneficiary sues for breach of fiduciary duty. Since guardians are appointed by a court to protect the ward from potential exploitation, courts require guardians to submit an accounting, usually annually, detailing how the ward's funds have been invested or spent. Any large purchases or non-necessary expenditures usually must be approved by a court ahead of time. Guardians are required to make the ward's assets last as long as possible, and are also responsible for filing tax returns for the ward.
- New York State Courts Justice Institute Guardian Assistance Network: The Guardian for Property Management
- Investment Company Institute: Frequently Asked Questions About Coverdale Education Savings Accounts
- Eli Lilly Federal Credit Union: UTMA, Rep Payee and Guardianship Accounts
- International Airline Employees Federal Credit Union: Custodial Accounts
- Tuberous Sclerosis Alliance: Guardianship
- FreddieMac: Understanding Custodial Accounts
A freelance writer since 1978 and attorney since 1981, Cindy Hill has won awards for articles on organic agriculture and wild foods, and has published widely in the areas of law, public policy, local foods and gardening. She holds a B.A. in political science from State University of New York and a Master of Environmental Law and a J.D. from Vermont Law School.