While there are no specific legal restrictions that prohibit a child from owning stocks, there are
certain “roadblocks” or rules that make the process more complicated. For instance, an
individual has to be at least eighteen years old to open a brokerage account, or conduct stock
transactions or investments. In short, this is because children are considered “minors” and
therefore do not have the capacity to enter into financial contracts. However, the analysis does
not stop there, as there are a few ways in which children can own stocks or other
assets–specifically, in Custodial Accounts, Trusts, and Education Savings Accounts.
Custodial Accounts
A custodial account is essentially a savings account that an adult can open on a child’s, or a
minor’s, behalf. Depending on the minor’s state of residence, a minor can be defined as an
individual under eighteen or twenty-one years (in Florida, for instance, a minor is defined as
someone eighteen years of age or younger). There is a lot of flexibility in using a custodial
account; for instance, the accounts do not require any distributions, nor do they contain income
or contribution limits.
While there are various types of custodial accounts, the most common variations are the Uniform
Gifts to Minors Act (UGMA), or the Uniform Transfers to Minors Act (UTMA). UGMA
accounts exist in all fifty states, and allow adults to give minors cash or securities in their
accounts. UTMA accounts, on the other hand, exist in every state besides Vermont and South
Carolina. Furthermore, UTMA accounts also allow for real estate transfers and various other
assets that are not allowed in UGMA accounts. In both accounts, however, minors are the ones
that benefit from the assets, even though the custodian (i.e., the adult) is the one that manages the
account until a minor reaches the appropriate age.
Trusts
Trusts also serve as a way to hold stocks or other assets for a child’s benefit until they reach a
certain age, or until certain conditions of the trust itself are met. A trust is defined as an
arrangement that allows a third party (a trustee) to hold assets on behalf of someone else (a
beneficiary). For the sake of this example, that beneficiary would be a minor that had minimal
control over the trust until certain conditions were met under the trust document itself. These
conditions depend on the terms of the trust; for instance, a child may be able to obtain those
assets when they reach a certain age, or when certain other conditions are met according to the
trust’s terms. A benefit of trusts is that they can be catered according to you and your family’s
estate planning needs, depending on how you want your assets to be structured and given to your
minor child(ren).
Education Savings Accounts
Finally, children can own assets in accounts like 529 Plans or Coverdell Education Savings
Accounts (ESAs). 529 Plans are tax-free savings plans that serve to encourage saving for future
education costs. These plans are sponsored by state agencies or educational institutions, and the
terms of these plans may vary depending on which state you reside in. Coverdell ESAs, on the
other hand, are similar, yet may provide more coverage than 529 Plans and cover expenses for
K-12 purchases (in addition to college expenses, like in the 529 Plans).
Both accounts, however, allow for investment in stocks and other assets, and these funds can be
utilized for qualified educational expenses. The funds also function so that the child, or the
minor, is the beneficiary of the account–that is, the minor is the one benefiting from these
mechanisms.
As this topic can be complex and dependent on your geographic location, specific assets, and
personal goals, it is important to consult with a financial advisor or tax professional who can
provide guidance specific to your situation and help you understand the legal and tax
implications of owning stocks as a child.
