Leaving a financial legacy for your children may seem impossible in our current economic climate. The cost of living seems to be moving faster than our pay raises can keep up with, if you’re lucky enough to get one. But investing for our children is totally different than investing for ourselves due to the most important aspect of investing: time in the market!

With the power of compounding, what may seem like amounts too small to make a difference turns into wealth that can improve the financial status of the generations that come from you. Investing on their behalf adds a decade or more to the time in the market. It’s time to put the market to work for future generations. To do this the right way, understanding the investment account types and the rules for each is important to know what moves you should make.

One of the most common starting points is a custodial account, often called a UTMA or UGMA account. These accounts are simple, flexible, and easy to open, but they also come with important rules you must understand before using them.

Let’s break this down in plain language.

A custodial account is an investment account opened for a minor, but managed by an adult until the child reaches a certain age called the “age of majority”. Until then, the funds are in the custody of the managing adult who is in charge of all investment decisions and withdrawals.

There are two types:

The only difference is what the account can hold:

Most families use these accounts for stocks, ETFs, or mutual funds so the type of account used usually doesn’t matter. Utilize the UTMA account if you want flexibility in the asset types you want to use later on. It’s as simple as selecting the UTMA option when opening a custodial account.

Money invested in a custodial account can come from anywhere. Mostly, parents gift money to the account from their earned income but can also give from passive income and/or gifts. Any contribution would be considered a gift to the child for tax purposes. Friends and family members can also contribute to a custodial account, it doesn’t have to be the managing adult with custody of the account.

The child can also contribute to their custodial account from earned income or gifts.

There is no requirement that the child earns income to fund this account. That makes custodial accounts very flexible and accessible.

The child takes custody of the account when they reach the age of majority. The age of majority is 18 for most states.

As the custodian, you decide:

However, once the child reaches the age of majority, the control of the account transfers to them. That age depends on the state, usually 18 or 21. See your states age threshold at the bottom of this article.

At that point, the child can:

Their ability to withdraw everything is what many parents fear with custodial accounts. This is why its imperative to teach financial literacy, not just have money for them. Access to capital with no training on how to use that capital leads to financial ruin.

No.

Once you open a custodial account for a specific child, it’s theirs permanently. You cannot change the beneficiary later. This makes custodial accounts very different from 529 plans, which allow beneficiary changes. Consider contributions to a custodial account as irrevocable gifts.

The short answer is no but there are somethings you need to be aware of, even if you won’t have to pay gift taxes.

Custodial accounts follow standard gift tax rules. For 2026, the annual gift tax exclusion amount is $19,000 per year, per child. This means you can contribute $19,000 to a custodial account without reporting this gift to the IRS. Married couples can gift $38,000 per year, per child and stay under the threshold.

Any amount contributed over the $19k threshold in a calendar year must be reported on a gift tax return. This means if you give $20k in a year to a custodial account, you must report $1k on a gift tax return. You don’t owe gift taxes at this point, as some people think. That $1k will count against the lifetime gift tax exclusion of $15 million. Most families will never exceed these limits, but they’re important to know so you can stay compliant with the IRS.

There is no formal contribution limit for custodial accounts. You can contribute as much as you want, but remember, gift tax consideration kicks in after $19k, annually, as of the 2026 tax year.

There is also no limit to how much can be gifted in any year or in total. If multiple friends and family members want to contribute in any year, they can. Each person is still subject to their $19k gift tax exclusion but your child will not suffer any fine or taxes due to any amount of contributions.

The child will not be taxes for any contributions. But there are what’s called the “kiddie tax” on income from the investments in the custodial account. Like any other investment account, capital gains, dividends, or distributions from real estate investment trusts or limited partnerships are considered investment income and subject to tax.

2026 Unearned Income Thresholds for Children

Be aware that large custodial accounts can have a significant impact on the family’s tax liability. Remember, withdrawals form the custodial account must be for the benefit/use for the child. Taxes owed by the child for their unearned investment income would be a qualified use for withdrawal.

✅ Easy to open

All you need is identification to confirm your identity, the minor’s full name, birth date, and SSN and an initial deposit. You can hop online and open a custodial account for your child now! This is available on many brokerage platforms like Fidelity, Vanguard, or Schwab.

✅ Flexible investment options

Unlike 529 accounts, you’re able to invest in any common stock, ETF, or mutual fund that is available on the stock exchange.

✅ No income requirement

The child doesn’t have to have earned income, unlike with an IRA.

✅ Teaches kids about investing

This gives a special opportunity for you to show your child the world of investing. Allow them to participate in the stock selection process.

✅ Great for long-term compounding

The big reward for the family legacy comes if the child keeps these funds invested when they take custody of the funds. This will secure their financial future.

❌ Child gains full control at adulthood

Hopefully, your child doesn’t use this as expendable money and keeps the funds invested for a long-period allowing compounding to do its magic. If that’s your goal for this account.

❌ Cannot change beneficiary

Other accounts, such as a 529, allow you to change the beneficiary if necessary. Giving to a custodial account is giving an irrevocable gift. It may be in your custody, but the money belongs to the child.

❌ Potential tax drag from kiddie tax

Though the benefits outweigh the costs, you have to consider the tax impact on the household for large custodial balances.

❌ Assets count against financial aid

Custodial accounts are considered the child’s assets for financial aid purposes. Up to 20% of the account balance will be counted against the child when it comes to the expected family contribution, now referred to as the Student Aid Index (SAI).

❌ Money must be used for the child

There is no flexibility here. The money withdrawn must be used for the child’s benefit. If money is withdrawn, keep records to prove the funds were used to benefit the child.

Custodial accounts work best when:

Custodial accounts are powerful tools if you understand the tradeoffs.

They are simple, flexible, and excellent for long-term investing, but they require trust and intentional parenting. Money alone won’t build generational wealth. Education, values, and guidance matter just as much.

In Part 2 of this series, I’ll rundown IRA’s for children, where retirement and/or helping with their first home is the primary focus. Wealth is about balance and knowing the right combinations of accounts to use will make all the difference.

Disclaimer: The thresholds provided in this article are current as of the 2026 tax year. These thresholds change periodically based on what legislation deems appropriate. Typically, they will be raised to account for the impact of inflation.

Age of Majority by State