Custodial accounts and guardian accounts both involve handling finances for those who are not able to manage their own money, but they fall under different legal guidelines and have separate purposes. Custodial accounts are investment accounts for children, and guardian accounts are for those who need help with their financial transactions due to a disability.
Custodial Account
Parents can choose to open a custodial account for their children. The funds deposited into this account are a gift to the child, and the parent cannot take it back. The money belongs to the child, and the parents act as managers of the account. Under the Uniform Transfers to Minors Act, parents can only use the money in these accounts for the child’s gain and never for their own benefit. Once the child turns 18 or 21 (the exact age depends on state laws), they gain control of the funds.
Guardian Account
You must have a court order to open a guardian account. The court appoints a guardian to manage these types of accounts for anyone who is physically or mentally disabled and unable to handle their own finances. The money belongs to the person who is disabled, and the guardian performs any necessary account transactions for them. The guardian is required to submit all account activity to the court on a recurring basis to ensure that they act in the best interest of the account owner.
Risks
Because the courts oversee all guardian accounts, there is no risk associated with them. However, custodial accounts are not without risk. Having a custodial account can risk a child’s chance of receiving financial aid in the future. It may appear that the child already has substantial assets and does not need help paying for college. These accounts may be better for parents who plan to save enough money for their child’s education so that they will not need any financial aid.
Tax Considerations
With a guardian account, the guardian has no tax responsibilities, and the tax preparer uses the account owner’s Social Security number when filing taxes. Custodial parents may have to file a tax return for their child. The IRS states that if a child has investment income over a certain amount, parents may have to pay taxes on it at their own rate instead of at the child’s rate.
