Trust Funds vs. Custodial Accounts – Understanding the Difference

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Trust Funds vs. Custodial Accounts – Understanding the Difference

16 October 2017
 Categories: , Blog

There are a number of strategies parents and grandparents can use to pass along the assets they have worked so hard to accumulate. It is important for every family to carefully plan how they will distribute their assets. The passing on of assets to children and others can be a difficult and emotionally charged issue, but it is also an important one. It is vital for parents to honestly assess the financial responsibility of their offspring as well as their monetary needs in order to make the right decision.

One of the basic choices faced by parents and grandparents is whether to establish a custodial account or a trust fund to take care of their children's needs. There are advantages and disadvantages to both approaches, and it is important to consult with a tax advisor or accountant to discuss the tax and other financial implications of each move.

The chief difference between the trust fund and the custodial account is who controls the money. In a custodial arrangement, the account is owned by the beneficiary, and he or she is entitled to the money upon reaching the proper age. When the child named in the custodial account becomes an adult, he or she is free to spend that money anyway he or she sees fit, whether that means paying for college or buying a fancy new sports car.

A trust fund, on the other hand, provides the person giving the money with a great deal more control, since the assets are owned by the trust. The terms of the trust will dictate such things as how often the money is to be doled out, how much the beneficiary is entitled to and at what age the payments will begin. Additional restrictions and requirements, such as the requirement that the beneficiary be employed or in school, can be set as well.

Trusts are generally more complicated and expensive to set up than custodial accounts, so it is important for parents and grandparents to consider their options carefully when making such an important choice. The financial responsibility of the children in question will of course be a big factor, as will any specific dynamics within the family. It is a good idea for families to discuss these issues and weigh the pros and cons carefully.

Trust funds and custodial accounts have a great deal in common, but there are some important differences to be aware of as well. Talk to your tax accountant for custom-based advice.