Minors are not legally entitled to own securities, as they cannot execute a contract, e.g., endorse a stock certificate. Thus, a stockbroker can prudently maintain an account for a minor only through an adult custodian Such accounts are regulated in all states by the Uniform Gifts to Minors Act, which includes the following rules for custodian accounts:
1. All gifts to minors must be irrevocable. This means the donor gives up all rights and may not withdraw the gift, nor can the minor return it. Gifts must be “new;” property already owned by the minor cannot be part of a gift.
2. The donor can give cash or securities of any type; there is no limitation on the amount. In most (but not all states), gifts under the Uniform Gift for Minor’s Act cannot be established through a will.
3. The donor appoints the custodian who may be the donor or another party. However, when the gift is bearer securities, the custodian must be someone else.
4. Custodian accounts cannot purchase securities on margin (using margin accounts) or pledge securities for a loan. Securities donated as a gift cannot be purchased on margin.
5. There can only be one custodian and one minor for each account. Neither joint custodians nor joint tenants are permitted.
6. Securities bought for or sold from the account must be in registered form, in the customer’s name, showing the minor as legal owner. For example, “John Doe as Custodian for Sally Doe under the Uniform Gift for Minor’s Act of the State of New York.” Bearer instruments and stocks held in “street name” cannot be held in the accounts. In the past, this also excludes options, since there is no evidence of ownership. (Bearer securities can be given to a minor if accompanied by a Deed of Gift, but the donor may not designate himself or herself as the custodian of such securities.)
7. Any payment from the account must be in the name of the custodian acting on behalf of the minor and never in the custodian’s name alone.
8. The account must show the minor’s tax identification number; the minor bears tax liability for the account.
9. The account is completely controlled by the custodian who may buy or sell securities and exercise (or not exercise) rights or warrants solely as he or she sees fit. This also means that the custodian cannot enter into an agreement allowing a third party to trade in the account.
10. If the custodian dies or resigns, a new custodian must be appointed by a court (unless the custodian designates a successor).
If the minor dies, the account is terminated and the gift becomes part of the minor’s estate.
11. Money may be taken from the account for the minor’s benefit; for example, for his or her support or education.
12. The custodian must maintain proper records. He or she is entitled to a reasonable sum for services in operating the account and to reimbursement for expenses if he or she is not a donor.
13. Finally, once the minor reaches the age of majority, all securities and cash in the account must be transferred into his or her name.
Quote of the week: “Concealed talent brings no reputation.” – Erasmus
Bart Ward is the chief executive officer of Ward & Co. Ltd., an Anoka-based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.