With few exceptions, such as United States savings bonds, minors are prohibited by law from owning securities in their own names, but you can still help young people save and invest for their future. One of the quickest and easiest ways to set up an investment account for a young relative, such as an under-aged niece, is to open a custodial account on her behalf.
UGMA and UTMA
You can open a custodial account for your minor niece under the provisions of either the Uniform Gift to Minors Act or the Uniform Transfer to Minors Act. The provisions of these acts vary slightly from state to state, and different financial institutions might offer either or both types of custodial accounts. One of the most significant differences between the two acts has to do with when your niece gains control over the assets in the account. If you set up a custodial account under a UGMA your niece typically gets control of the account once she turns 18 years of age. She has to be 21 before she can access the assets in a UTMA account.
You need to open a new custodial account with each financial institution you want to do business with. Each company has its own rules and application process, but a few things remain constant. For example, if you open a custodial investment account for your minor niece, she is the primary account holder. You have to provide her Social Security number to open the account. You can act as the account custodian, but you don't have to. You can designate another adult, such as one of your niece's parents, as the custodian. You also have to provide the Social Security number for whoever acts as the account custodian.
A number of types of financial institutions, including investment brokerage firms, mutual fund companies and direct stock investment plans with individual companies allow you to open a custodial account. The application process is similar to opening an individual account. You have to supply personal information for both your niece and the account custodian, including name, physical address, contact information and citizenship, and you have to identify the account as a custodial account.
Gifts or transfers of assets, including money, into your niece's custodial account are irrevocable. Once the asset goes into the account, you can't take it back, and your niece can't even give it back to you. The custodian has control over the account, but assets in the account can only be used for your niece's benefit. Since the account belongs to your niece, she is responsible for any tax consequences that result from investments in the account. Once she reaches her majority, either at age 18 or 21, the account ceases to be a custodial account; she gains complete control over the assets, and she can do as she pleases with them.
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