Custodial accounts are bank or brokerage accounts that are created by an adult for the benefit of a minor. The minor technically owns the account but has no legal right to make withdrawals even in the event that the account custodian dies. State laws dictate the manner in which new custodians are appointed to custodial accounts after the death of the original custodian.
An adult can transfer cash to a child using the Uniform Gifts to Minors Act, while the Uniform Transfer to Minors Act allows an adult to pass cash or other types of securities to a minor. In legal terms, people who make these gifts are called Transferors. A transferor can act as the custodian of an account or appoint someone else to act as the custodian. Many transferors appoint a successor custodian at account opening and that person assumes control of the account upon the death of the custodian.
In some states, a transferor who failed to appoint a successor custodian at account opening can step in to act as custodian when the custodian dies. Alternatively, the transferor can appoint a new custodian at that time. If the transferor was the custodian and the transferor dies, some states allow the legal guardian of the child to become the new custodian of the account. In Massachusetts, a child who has reached the age of 14 can choose a new custodian if the original custodian dies, but other states do not allow children to have a say in choosing a custodian.
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In most states, people reach legal adulthood at the age of 18. Custodians are required to close custodial accounts when the beneficiary reaches age 18 and to hand over the account's proceeds to the beneficiary. However, banks do not keep track of the ages of account holders and banks are under no legal obligation to close a custodial account purely on the basis that the beneficiary has reached legal adulthood. Banks typically do not close custodial accounts without being instructed to do so by a custodian or successor custodian even if the beneficiary has reached age 18.
Custodial accounts are commonly used because laws in most states do not allow children or legal minors to operate their own bank accounts. However, in some states such as Oklahoma, children can open their own bank accounts. Many people open joint accounts along with their young children and effectively manage the account on the child's behalf. However, in such cases, these adults are joint owners rather than custodians. Therefore, when the adult dies, the child assumes full control of the account.