Custodial Accounts v. Guardianship Accounts: Knowing the diferences

If grandma is leaving an inheritance to a minor, there are many different ways of making sure the minor will safely receive his or her money.   I'm often asked about the differences in guardianship accounts v. custodial accounts and how they are different.   In California, here are the ways the accounts are different:

• Guardianship accounts:  A Guardian must be court appointed.  A bond needs to be set for the guardian or waived by the parent of the minor in a will or other instrument.   A Guardian is obligated to file an accounting in the court.   A guardian who is a parent of the child CANNOT use the money of the guardianship to discharge his/her duty to support his/her kid or other kids in the family.   What this means is that if there is an expense that the parent guardian is legally obligated to pay, it has to paid from his earnings, and not from the guardianship assets.    For example, normal educational needs of the minor have to be paid for from the earnings of the parent guardian, NOT from the guardianship accounts.   However, a parent guardian can apply to the court to ask whether the court will authorize him to pay for unusual educational expenses of the minor from the minor's funds.    In most cases, the court orders most of the assets of the minor to be placed in blocked accounts.   The guardian is not allowed to use the guardianship account for his own personal use.  The guardianship must end upon the minor reaching 18 years of age.   The guardian can be held responsible to the minor for an extended period even after the guardianship ends.
• Custodial accounts:   A custodian of the minor does not necessarily need to be appointed by the court and the custodial assets can be transferred to the custodian outside of court.    In California, a custodial account can be established in several ways.    For example, a grandparent can nominate a custodian of the funds of the minor in a separate document, such as a nomination instrument, or simply on a stock account as a beneficiary.    The designation has to be specific and must state that X is acting as the custodian for Y (minor).   In California, the custodial account distribution age can be arranged ranging from 18 to 21.    Custodial accounts can be used to support the minor to supplement, but not replace the parental legal obligation to support the minor.    The minor does have a right to request an accounting at the end of the term of the custodianship.    You can designate different custodians for different accounts for the benefit of the same minor.    The custodian cannot use the minor's funds for the custodian's personal use, but the account is not blocked.   There is no requirement of a formal accounting in court unless the minor demands it.

Knowing the differences between a guardianship account and a custodial account can save a lot of money and lots of headache and court proceedings.   There are some pitfalls in planning in this area.   Custodial accounts should be avoided where the minor has special needs and where the gifts or inheritances are large enough to require tax planning.  Contents of this blog post are not intended to be legal advice, and are educational.    You must always consult an attorney to discuss your specific situation.   To retain us as counsel, please contact our office for an appointment.

Mina N. Sirkin is a Family Wealth Lawyer and a TV legal expert in Los Angeles, California.   Ms. Sirkin is a Board Certified Specialist in Estate Planning, Probate and Trust Law by the Board of Legal Specialization of the State Bar of California.   MSirkin@SirkinLaw.com.   http://www.SirkinLaw.com.   Tel: 818-340-4479.

Comments

[Daniel Printz, Esq.]

Nice posting! Clear and informative information on holding an asset for a minor.