Custodial accounts have become over time an important financial tool to create future financial stability for children. This tool is commonly used worldwide, although in different forms.
In this article, we will cover all you need to know about custodial accounts around the world, keeping an eye on how fintech (financial technology) is influencing this important means to stability.
What’s a Custodial Account, Anyway?
A custodial account is a type of financial account created for a person under the age of majority. The person who creates the fund is the custodian of the account, able to manage the funds in the name of the minor until he or she reaches the age of majority.
In practical terms, it is a bank account. The funds saved can be invested and are not linked to any particular usage after the minor can redeem the funds.
How Does It Work? Step-by-Step Guide
Let’s see, in detail, how a custodial account works:
Step 1 – Account Opening:
The custodian opens the account on behalf of the minor, as is usually done with a bank account. All the minor’s personal information must be provided.
Step 2 – Contributions:
Anyone can contribute to the custodial account, and there are no limits to the contributions, but it is important to note that these contributions are irrevocable gifts to the minor. Moreover, contributors should consider that contributions must be considered in terms of taxes.
Step 3 – Investment (Optional):
As mentioned, the funds in the custodial account can be invested in different financial assets to potentially increase the amount of funds. Of course, it is up to the custodian to invest the funds wisely.
Step 4 – Taxes:
The account is taxed at the minor’s tax rate, which is typically lower than the custodian’s rate. Even if details on taxes can change according to the country and jurisdiction, there might be exemptions on certain amounts precisely because the funds are in reality owned by a minor.
Step 5 – Use of Funds:
Even if the funds belong to the minor and can’t be redeemed by the custodian, the custodian can use the funds for expenses related to the minor. This can include expenses related to the minor’s education, health, and welfare.
Step 6 – Transfer of Control:
When the minor reaches the age of majority, control of the account must be transferred to them.
Custodial Accounts Around the World
Even if fintech is making access to custodial accounts more global, it is important to understand that when it comes to financial accounts and taxes, every country or region has specific rules and cultural values.
Moreover, macroeconomic factors should be considered: a region that is economically stable might offer more advantages when it comes to custodial accounts, and custodians might have more possibilities to contribute to the account.
Let’s see how custodial accounts work around the world, identifying the main differences among regions.
North America (U.S. and Canada)
In the United States there are mainly two types of custodial accounts:
- UGMA (Uniform Gifts to Minors Act): Allows for cash, stocks, mutual funds, and insurance policies to be held.
- UTMA (Uniform Transfers to Minors Act): Has a broader allowance, which includes real estate, paintings, and other assets.
Unlike 529 plans, which are specifically for education expenses, custodial accounts don’t have restrictions on how the money is spent, as long as it’s for the benefit of the minor.
For what concerns Canada, the country offers Registered Education Savings Plans (RESPs), which allow savings for a child’s education to grow tax-free until the child is ready for post-secondary education.
Europe
Many European countries have child savings accounts that offer tax benefits. For example, the Junior ISA in the UK is a tax-advantaged savings account for children.
In Germany, there are special savings accounts for children (Sparkonto für Kinder), which parents can use to save money for their children’s future.
Asia
Countries like India have schemes like the Sukanya Samriddhi Account, aimed at encouraging savings for a girl child’s education and marriage expenses.
In China, the government encourages saving for children through various bank savings products, some of which may have educational or health benefits attached.
Australia
Australia has specific savings accounts for children, like children’s savings accounts, which often have favorable interest rates to encourage saving from an early age.
Africa
Savings options for children may be less formalized in some African countries, but there are still savings accounts aimed at the younger population, often offered by major banks to encourage family saving.
South America
In countries like Brazil, there are savings plans for children that can be used for education or to provide a financial start once they reach adulthood.
Middle East
The concept of saving for children is also prevalent in the Middle East, with several banks offering savings accounts specifically designed for minors, often linked to education or future investment.
Global Fintech Influence on Custodial Accounts
As mentioned, financial technology is making access to custodial accounts easier and global. Nevertheless, there are fintech products tailored to the specific requirements and cultural values of different regions.
Let’s see what the impact of fintech on custodial accounts is, as well as some practical examples of fintech companies and products that have created accounts aimed at establishing financial stability for minors.
Financial Technology and Custodial Accounts
Fintech helps with creating and nmanaging custodial accounts and similar products by offering intuitive and unique features that allow to have full control over the creation of financial stability for minors without giving up on simplicity.
These features comprehend:
Digital Onboarding and Account Management:
Fintech platforms offer user-friendly interfaces that allow parents to set up custodial accounts online quickly. For example, apps like Acorns in the U.S. provide easy ways to start investing for children’s futures with their Early accounts.
Automated Contributions:
Many fintech services enable automatic transfers and investment contributions. In the UK, apps like Moneybox allow parents to round up spare change from everyday purchases into a Junior ISA.
Diverse Investment Options:
Fintech companies often provide access to a broader range of investment products. Wealthsimple in Canada offers various ETFs and other investment vehicles for RESP accounts.
Educational Resources:
Platforms like Mylo in Canada and GoHenry in the UK provide educational content to help both parents and children understand saving and investing principles.
Global Accessibility:
Fintech makes financial products more accessible across borders. For instance, Revolut offers features that could be used for saving and managing funds for children, available in many countries.
Tracking and Reporting:
Apps like UNest in the U.S. provide intuitive dashboards for tracking the growth of investments in custodial accounts, making it easier for parents to plan for their child’s financial needs.
Micro-Investing for Children:
Fintech apps enable parents to invest small amounts regularly. In Australia, platforms like Raiz offer features similar to a custodial account, where parents can invest spare change for their children’s future.
Cross-Border Savings:
Fintech solutions like TransferWise (now Wise) allow parents working abroad to contribute to their children’s savings accounts back home without hefty transaction fees.
Integration with Educational Institutions:
Some fintech companies collaborate with educational institutions to directly link savings with tuition payments. For example, Climb Credit in the U.S. works with schools to finance education.
Peer-to-Peer Payments:
Platforms like Zelle or Venmo in the U.S. can be used by family members to contribute to a child’s savings easily, which can then be transferred to custodial accounts.
In conclusion, fintech is making it easier than ever for parents worldwide to set up, contribute to, and manage custodial accounts. The integration of technology in finance not only simplifies the process but also provides educational tools to help the next generation become financially savvy.
Advantages and Disadvantages of Custodial Accounts
| Pros of Custodial Accounts | Cons of Custodial Accounts |
| Ease of Setup | Irrevocable Gifts |
| No Contribution Limits | Loss of Control at Age of Majority |
| Flexibility in Use | Impact on Financial Aid |
| Investment Growth | Tax Implications |
| Financial Education | Limited Investment Options |
| Gift and Estate Tax Benefits | No Tax Deferral |
| Transfer of Wealth | Potential for Misuse |
| Control by Custodian | Legal and Beneficiary Limitations |
Wrapping it Up
It’s evident that fintech’s role in reshaping custodial accounts is profound. Parents and custodians can open accounts, save, and invest money more easily by leveraging products designed to simplify complex processes and make both custodians and minors financially savvy, thanks to extensive educational resources.
Building a stable financial future for the next generation is pivotal, and financial technology assists you in the creation of that stability.
FAQs
What is a custodial account?
A custodial account is a financial account set up for a minor by a custodian. It’s a place to save and invest money for the child’s future, which the child can access when they reach legal adulthood.
How does fintech influence custodial accounts?
Fintech simplifies the creation and management of custodial accounts through user-friendly digital platforms, automated contributions, diverse investment options, and educational resources, making it easier for parents to secure their children’s financial future.
Can fintech help with global access to custodial accounts?
Yes, fintech expands global access to custodial accounts, allowing for easy account setup, management, and cross-border contributions, often with lower fees and real-time tracking of investments.
