Before you begin, you should know that custodial accounts come with specific rules set by the government. These rules ensure the money is handled fairly and used for your future.

1. Irrevocable Gifts (Ownership)

• The Rule: Any money or stock put into a custodial account is an "irrevocable gift." This means once it is in the account, it legally belongs to the minor.

• For Youth: Think of this like a birthday present that has already been opened. Even though an adult helps you manage the account for now, they cannot legally take the money back or use it to pay their own bills.

• For Parents: You have a "fiduciary duty" to manage these assets solely for the minor's benefit. Because it is a permanent transfer, you cannot "undo" the gift or move it to a different child’s account later.

2. The "Kiddie Tax" (Earnings)

• The Rule: The IRS has a limit on how much investment income (like dividends or capital gains) a minor can earn at their own lower tax rate.

• For Youth: If your investments grow a lot and earn a high amount of profit in one year, the government might tax the extra portion at your parents' higher tax rate. This exists to prevent adults from using kids' accounts just to avoid paying their own taxes.

• For Parents: The IRS sets a "threshold" every year. Usually, the first portion of a child's investment income is tax-free, the next portion is taxed at the child's rate, and anything above that threshold is taxed at the parent's marginal rate.

3. College Financial Aid (Future Planning)

• The Rule: When applying for college financial aid (like the FAFSA in the U.S.), the government looks at who owns the assets.

• For Youth: Because this money is in your name, it might reduce the amount of financial aid you get for college. The government expects students to contribute a larger percentage of their own savings toward school than they expect parents to contribute.

• For Parents: Student-owned assets (like UGMAs/UTMAs) are assessed at a higher rate (usually 20%) than parent-owned assets (usually around 5.6%) when calculating aid eligibility. Some families choose to move these funds into a Custodial 529 Plan before college to improve their aid outlook.