Exploring the World of Custodial Accounts

Custodial accounts can be a helpful tool in effective financial planning, offering a structured way for individuals to invest and manage funds for the benefit of their children or grandchildren. These accounts provide a valuable opportunity not only for financial growth but also for education and instilling financial responsibility in the younger generation. Let’s look at how custodial accounts can be used as part of a broader financial planning initiative.

Navigating the two chapters of custodial accounts

Custodial accounts are often characterized as having two distinct chapters. In the “first chapter,” which typically spans until the child reaches adulthood (as determined by state laws or the specific terms of the account), the custodian exercises full control over the account. This includes making investment decisions, managing contributions and withdrawals and overseeing the overall growth of the funds held in this account.

Once the child reaches adulthood, usually at the age of majority, they gain control of the account in what can be termed the “second chapter.” At this point, the custodian’s role diminishes by design, and the young adult assumes responsibility for managing the account and making financial decisions. This transition marks a crucial phase where clear communication and aligned intentions become paramount.

Fortunately, at this time, custodial accounts do not require distributions at any point, leading to greater potential for longer-term compound growth. Keep in mind the custodian will be responsible for filing tax forms on the child’s behalf for any taxable income that’s earned.

Educational opportunities and financial literacy

One of the most significant advantages of custodial accounts is the educational aspect they offer. During the initial phase, when the custodian has full control over the account, it allows them to make investment decisions and manage funds on behalf of the child or grandchild. This phase presents a unique opportunity to educate the younger generation about investing, wealth creation and the power of financial discipline.

By involving children in discussions about investment strategies, risk management and the importance of long-term financial planning, custodial accounts can play a crucial role in developing financial literacy from a young age. This early exposure to financial concepts sets a solid foundation for responsible money management in the future, helping facilitate the process of building long-term wealth.

Managing risks and mitigating challenges

While custodial accounts offer numerous benefits, it’s essential to be mindful of potential risks and challenges that may arise, particularly during the second chapter. Over-funding the account beyond what is necessary or exposing it to creditors may pose obstacles. For example, in the event of legal liabilities or financial difficulties faced by the young adult, the assets in the custodial account may be at risk.

To help mitigate these risks, careful planning and risk management strategies are essential. This includes regularly reviewing the funding levels of the account, considering alternative vehicles like trusts (for larger sums) or 529 plans and seeking guidance from your Corient Wealth Advisor and/or legal professionals.

Clear communication and intentions

One of the keys to successful custodial account management is clear and open communication regarding intentions for the account and expectations regarding the usage of the funds held within it. The custodian should be diligent about articulating their primary goals for the account, whether it’s to support education expenses, contribute to a down payment on a home or facilitate entrepreneurial endeavors.

By discussing these intentions openly and revisiting them periodically, both the custodian and the young adult can ensure that the account’s funds are used in alignment with the original purpose. This communication fosters trust, transparency and accountability, contributing to a smoother transition of control during the second chapter.

Consulting with advisors for strategic guidance

Navigating the complexities of custodial accounts and making informed decisions requires strategic guidance from financial advisors or legal professionals. These experts can offer personalized advice based on individual circumstances, help determine appropriate funding levels, explore alternative strategies and address specific financial goals and concerns.

Whether it’s assessing the suitability of custodial accounts, optimizing investment allocations or planning for possible contingencies, advisors play a crucial role in shaping a comprehensive financial strategy that aligns with long-term objectives.


Custodial accounts can serve as powerful tools for financial planning and education, offering numerous benefits to children that could last a lifetime. However, there are also potential challenges with custodial accounts that require careful consideration and management. By understanding the educational opportunities, navigating the two chapters of custodial accounts, managing risks effectively, communicating intentions clearly and seeking guidance from qualified advisors, individuals may be well positioned to maximize the potential of custodial accounts. And, as part of an enduring legacy, parents or grandparents can also use these accounts to help lay a strong foundation for financial success and stability across generations.


Anna Diaz, CFP®

Anna Diaz, CFP®

Partner, Wealth Advisor

Anna is a Partner, Wealth Advisor in our San Diego office. Passionate about helping her clients both understand and navigate the financial questions they face throughout their lives, she especially loves partnering with people to accomplish true success on their terms. Anna has over 20 years of experience in the wealth advisory field and holds elevated designations such as the CERTIFIED FINANCIAL PLANNER™ certification, Certified Private Wealth Advisor (CPWA) and Certified Exit Planning Advisor (CEPA) designations. She also holds an executive certificate in Investment Strategies and Portfolio Management from Wharton and is currently studying for the Accredited Estate Planner designation (AEP). Anna enjoys simplifying the complex financial world so her clients maximize their outcomes, feel empowered in their financial decisions and feel they have a partner who has a close eye on their financial wellness.  Anna is passionate about giving back and serves on the board of Stella Foundation, an organization that helps female founders. She is most proud of her role as a mom to her two children and has been married to her husband for 15 years. Anna loves being outdoors in her city, family time, reading, music (of all types!) and salsa dancing when she gets the chance.


This information is for educational purposes and is not intended to provide, and should not be relied upon for, accounting, legal, tax, insurance, or investment advice.  This does not constitute an offer to provide any services, nor a solicitation to purchase securities. The contents are not intended to be advice tailored to any particular person or situation. We believe the information provided is accurate and reliable, but do not warrant it as to completeness or accuracy.  This information may include opinions or forecasts, including investment strategies and economic and market conditions; however, there is no guarantee that such opinions or forecasts will prove to be correct, and they also may change without notice.  We encourage you to speak with a qualified professional regarding your scenario and the then-current applicable laws and rules.

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