Savings VS. Custodial account?

kat.hayes

My father wants to put money every year into an account that my son (currently 4 years old) will use when she turns sixteen to buy a car.

1. By putting the money into the custodial account, does this mean that he will not have to declare any interest income every year on his taxes?
2. What other reasons are there to use a custodial account vs. just a regular savings account?
3. One possible issue with the custodial account seems to be that only one person can be designated as the "custodian" of the account. Is this correct? Any idea why this is?

Thanks.

bowlhead99

kat.hayes wrote: »

an account that my son (currently 4 years old) will use when she turns sixteen to buy a car.

Gender confusion?

Is this just some hypothetical question made up by a troll? Or real life?

1. By putting the money into the custodial account, does this mean that he will not have to declare any interest income every year on his taxes?

a) "Custodial account" is not a common term here in the UK where this forum is based, and 16-year-olds are not allowed to drive. But for the sake of discussion, do you mean some sort of trust with your father as trustee and son/daughter as beneficiary?

b) if your father is not the legal beneficiary of the trust then he will not need to declare income as his own, as it doesn't belong to him, it belongs to the trust (in the case of a discretionary trust - in which case the trust is the entity responsible for paying taxes) or the beneficiary - the child (in the case of a bare trust - in which case the child is the person on whom the income is taxable).

c) you mention 'interest income'. If the money is intended to grow over a term of 12 or more years, you may be better looking at investment options which provide capital growth and dividends rather than interest income as interest income on a cash deposit may not hold its value against the loss of purchasing power from inflation.

2. What other reasons are there to use a custodial account vs. just a regular savings account?

It depends what you mean by a custodial account - as mentioned, that is not a popular term for standard retail accounts in the UK. But if the effect is that the father is only the legal owner and not the absolute beneficial owner, then advantages include

- income and capital gains do not belong to the father for tax purposes.

- the gift from the father takes it out of his estate for inheritance tax/ estate tax purposes.

- if the father needs to claim means-tested benefits the money placed into trust or given away absolutely is no longer his for capital assessment purposes (although see deprivation of assets rules).

- if the father is chased by creditors or bankruptcy court the money is no longer his but the child's.

3. One possible issue with the custodial account seems to be that only one person can be designated as the "custodian" of the account. Is this correct? Any idea why this is?

That's how some accounts work. For example, an analogy in the UK would be a Junior ISA which allows one "Registered Contact" and that registered contact can change only with the consent of that existing registered contact unless there are some exceptional conditions such as incapacity of that contact. A Junior ISA would be inappropriate in this situation anyway as the money can't be withdrawn at age 16 but only at 18.

However, other trust accounts can have multiple trustees and each of them allowed sole or joint signing rights over the account.