A brokerage account is a must-have if you want to be a great investor. With a brokerage account, you can buy and sell stocks along with a host of other investments that can help you reach your financial goals. The more time you have to invest, the more likely you are to achieve the growth in your portfolio that you're seeking to attain.
For most people, owning a brokerage account in their own name is the simplest solution available.
But what if you want to open an investment account for a child? Most brokers and financial institutions won't let minor children open accounts directly. If you want your children to have their own investments, opening custodial brokerage accounts can be a great solution that will open their eyes to the possibilities of the investing world and give them a head start on long-term financial success. However, custodial accounts also have some requirements you have to follow, along with some potential traps for the unwary.
What is a custodial account?
A custodial brokerage account is an account that a person sets up on behalf of a minor child.
Most commonly, custodial accounts are held by parents, but there's no limitation on who can act as the custodian of a custodial account. Grandparents, other family members, or even family friends or professionals have the capacity to open custodial accounts on behalf of a child.
The most important characteristic about a custodial account is that opening the account creates something called a "fiduciary relationship" between the custodian and the child.
In other words, once you open a custodial account, you no longer have unlimited control over the assets in that account. The money in the account legally becomes the property of the child. As such, you have to invest assets and spend money in the account in the best interests of the child named on the account.
Within the framework of that relationship, the custodian has full authority to manage the assets in the account. The financial institution where the account is held will accept investing instructions from the custodian, and typically, you'll be able to execute trades or conduct other business in exactly the same way you'd do it with your own account. There aren't any limitations on investments possible within a custodial account that are different from what applies to any brokerage account.
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