Is A Custodial Account The Best Option For Your Children's Inheritance?

When you have minor children, part of estate planning is ensuring they are financially secure if something happens to you. One option that many parents choose is setting up a custodial account. If you are considering establishing one, here is what you need to know. 

Why Should You Use a Custodial Account?

A custodial account has several advantages that makes them a popular option in estate planning. One of the advantages is that the account is relatively easy to establish. As a result, many parents opt to set it up themselves without the assistance of an attorney. 

 Custodial accounts do not have limits on what you can contribute. You can transfer a wide range of assets, including real estate and bank deposits, to your children through the accounts. The account is viewed as a gift by the government, so you contribute as you want. 

Another benefit of the custodial account is that despite the need of a custodian over the account when your child is still a minor, he or she can take control of it at age 18 or 21. The age is determined by your state's laws. Your child will have the freedom to use the money in the way that he or she desires. 

Why Should You Not Use a Custodial Account?

Although there are many benefits to a custodial account, there are some drawbacks. For instance, even though your contributions are not limited, the funds are taxable. Depending on which state you live in, your child's inheritance could not only be subjected to federal taxes, but also state taxes. 

Another drawback of custodial accounts is that even though you might view your child getting control over the account at 18 or 21 as a positive thing, it could actually be a bad thing. There is no guarantee that your child will use the funds as you hoped. Instead of going to college, your child could opt to go on a shopping spree. 

The biggest drawback of a custodial account is that you cannot undo any actions concerning it. If you deposit funds in the account, they have to remain there until your child is legally able to take control of it. Even if there is a financial crisis, there is nothing you can do to take the money out of the account. 

If you are still unsure of whether or not a custodial account is the best option for you, work with an estate planning attorney from a company like Hurth Sisk & Blakemore LLP to assess the situation. He or she can also help you determine if an alternative options is best.