FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsEasy
A client wants to open an account for their 10-year-old child and maintain control over the assets until the child reaches the age of majority. They also want to ensure that the assets are used for the child's benefit, but they wish to avoid the complexities and costs of establishing a formal trust. Which type of account would be most suitable?
- ACustodial Account (UGMA/UTMA)
- B529 College Savings Plan
- CJoint Tenancy with Rights of Survivorship (JTWROS)
- DIndividual Retirement Account (IRA)
Show answer & explanationAnswer & explanation
Correct answer: A. Custodial Account (UGMA/UTMA)
Custodial accounts (UGMA/UTMA) are designed for this exact purpose: an adult (custodian) manages assets for a minor until they reach the age of majority, with the assets legally belonging to the minor. This avoids the complexity of a formal trust.
Why the other options are wrong
- B. 529 plans are for education savings, not general asset management for a minor, and the custodian does not retain control until the age of majority in the same way as UGMA/UTMA.
- C. JTWROS accounts are for two or more adults with equal ownership and rights of survivorship, not for minors under adult control.
- D. IRAs are retirement accounts and cannot be opened for a 10-year-old without earned income.
Custodial Accounts (UGMA/UTMA)
Accounts established for the benefit of a minor, where a custodian (usually an adult) manages the assets until the minor reaches the age of majority, at which point the assets are transferred to the minor.
- Assets legally belong to the minor
- Custodian manages the account
- Irrevocable gift to the minor
- Assets transfer to minor at age of majority
- Simpler and less costly than a trust
Memory trick: UGMA/UTMA: Uncle/Aunt Gives Money Away.