Permitted withdrawals from custodial account: Overview, definition, and example
What are permitted withdrawals from a custodial account?
Permitted withdrawals from a custodial account refer to the specific conditions under which funds or assets held in a custodial account can be withdrawn. A custodial account is typically a financial account managed by a custodian (such as a bank, trust company, or financial institution) for the benefit of a minor or another beneficiary. The custodian controls the account until the beneficiary reaches a certain age or meets other conditions outlined in the agreement. Permitted withdrawals are those that align with the rules and regulations governing the custodial account, which usually include using the funds for the benefit of the minor or according to the terms set by the grantor.
For example, in the case of a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account, the custodian may be allowed to make withdrawals for the minor’s education, healthcare, or general welfare before the minor reaches the age of majority.
Why are permitted withdrawals from custodial accounts important?
Permitted withdrawals from custodial accounts are important because they ensure that the funds or assets in the account are used for the intended purpose, typically to benefit the minor or designated beneficiary. These rules help maintain the integrity of the account, ensuring that withdrawals align with the beneficiary's needs and long-term interests.
For custodians, understanding the conditions for permitted withdrawals is essential for compliance with legal obligations and managing the account responsibly. For beneficiaries (or their parents), knowing the rules helps ensure that the funds are used appropriately and in their best interest, especially if the account is intended for future needs like education or medical expenses.
Understanding permitted withdrawals from custodial accounts through an example
A parent opens a custodial account for their child under the UGMA, contributing funds that will be used for the child's future. As the custodian, the parent is allowed to make permitted withdrawals from the account for expenses related to the child’s education or medical care. For example, if the child needs funds for school tuition or a medical procedure, the parent can withdraw money from the custodial account to pay for these expenses. The custodian must follow the rules of the custodial account and ensure that withdrawals are made for the child’s benefit, rather than for personal use.
In another case, a grandparent sets up a UTMA account for their grandchild, with the intention that the funds will be used when the child reaches college age. The grandparent, as the custodian, can make permitted withdrawals to pay for the child’s schooling, but cannot use the funds for anything outside the child’s benefit, such as personal expenses or investments for themselves.
An example of permitted withdrawals from custodial account clause
Here’s how this type of clause might appear in an agreement or custodial account document:
“The Custodian is authorized to make withdrawals from the Custodial Account for the benefit of the Minor, provided that the withdrawals are used for the Minor’s education, healthcare, or general welfare. Any withdrawals outside of these purposes require prior approval from the legal guardian or as otherwise specified by applicable law. The Custodian shall maintain documentation for all withdrawals made from the account.”
Conclusion
Permitted withdrawals from custodial accounts ensure that the funds held in these accounts are used appropriately and for the benefit of the designated beneficiary, typically a minor. These rules are important for maintaining legal compliance and protecting the interests of the beneficiary. Custodians must adhere to these guidelines to ensure that withdrawals are made for legitimate expenses, such as education or healthcare, while avoiding misuse of the funds. Understanding the terms of permitted withdrawals helps maintain the integrity of custodial accounts and ensures they fulfill their intended purpose.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.