Custodial Account vs. Guardian Account


Parents and grandparents often establish custodial accounts as college saving vehicles. However, guardian accounts are typically established for someone other than your children or grandchildren. Both accounts require you to manage money or investments for people who do not have the ability to manage their own affairs. Although custodian and guardian accounts have similarities, they have important differences and are used for different purposes.


You can establish a custodial account at most financial institutions under the Uniform Gift to Minors Act (UGMA) or the Uniform.Transfer to Minors Act (UTMA).With these accounts, you manage and make investment decisions until the minor reaches the age of majority. For children under age 18, the law exempts the first $950 of earnings on the account from taxes, as of 2011. You report the next $950 of earnings as income for the child. Any income on the account above $1,900 counts as income for the custodian. The tax advantage makes these accounts attractive for college saving. At the age of majority, which varies by state from age 18 to 25, the child assumes control and ownership


You must provide a financial institution with a court order to open a guardian account. The court order instructs you how to manage the account and supervises your activities, and you are required to submit regular reports to the court. You can use a guardian account to manage money and investments for anyone who is legally or physically unable to function. Guardian accounts are used for both minors and disabled individuals. You must continue as a guardian until a minor reaches the age of majority or the court formally releases you.


When you contribute to a custodial account for a minor, you are making an irrevocable gift, and the account belongs to the child. You have discretion on investment decisions until the child becomes an adult. However, you must manage the account as a fiduciary for the child. Legally you can only use funds to benefit the child. Guardian accounts are even more restrictive. A guardian must act as a court-appointed fiduciary. The court decides how you should manage the account.


A guardian account is more restrictive than a custodial account. It requires a court order to open and the court will supervise your activities. For both types of accounts, the account beneficiary is the actual owner. With either account, at the age of majority the beneficiary assumes control. As a guardian or custodian you can make transactions and manage the account for the beneficiary. However, the court will place limits on your discretion if you are managing a guardian account.

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