7.6 Custodial Accounts and Asset Ownership for Minors

Why are investment companies and banks reluctant to open accounts for minors?

• minors cannot legally contract

• minors are typically bad investors

• minors are unlikely to save much money

• minors tend to take their money out once they reach legal age

All of the following are true of custodial accounts, EXCEPT:

• custodial accounts represent a way parents can indefinitely control money they give to children

• minors can set up custodial accounts with a parent

• minors can set up custodial accounts with an older relative or friend

• custodians can withdraw money from a custodial account for the benefit of the minor

In which of the following can UGMA accounts invest?

I. Real estate

II. Mutual funds

III. Bonds

• I only

• I and III only

• II and III only

• I, II, and III

In which of the following can UTMA accounts invest?

I. Real estate

II. Mutual funds

III. Bonds

• I only

• I and III only

• II and III only

• I, II, and III

Ji-Yung is 14 years old and a young entrepreneur. She is interested in investing some of her savings in real estate. She recently found a small house that she can rent out to college students. Her dad has agreed to the idea. Ji-Yung and her dad learned that the property will need to be held in a custodial account until Ji-Yung turns 21. Which custodial account can be used in this situation?

• UGMA

• UTMA

• Either UGMA or UTMA

• Neither UGMA or UTMA

The tax benefits of custodial accounts mean that:

• earnings on investments in custodial accounts are tax-free

• all earnings on investments in custodial accounts are taxed at the custodian's tax rate

• the tax rate on the investment earnings could be as low as 0%

• earnings greater than $2,200 are protected

Custodial IRAs, whether Roth IRAs or traditional IRAs, allow minors to:

• begin saving for retirement prior to reaching age 16

• invest in long-term assets

• invest in bank CDs

• begin saving for retirement prior to reaching age 16, invest in long-term assets, and invest in bank CDs

What are the benefits of a custodial IRA?

• it offers tax-deferred growth on investment earnings

• it allows minors to begin building their long-term savings

• it gives minors full control of the accumulated funds in the custodial IRA once they reach the age of majority

• it offers tax-deferred growth on investment earnings, allows minors to begin building their long-term savings, and gives minors full control of the accumulated funds in the custodial IRA once they reach the age of majority

If parents are concerned their child may use money set aside for her or his college education unwisely, they could:

• establish a custodial IRA to prevent premature withdrawals

• establish a custodial account in another child's name

• refuse to allow minor to establish her or his own custodial account

• establish a 529 plan to maintain control of the funds gifted

If a parent's intent is to save for their child's education, which savings product is best?

• UTMA

• savings account

• UGMA

• qualified tuition program