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👥 Customer Accounts · Lesson 4 of 8 · 5 min

Custodial, Trust and Entity Accounts

🎁 Grandpa gives his grandson $5,000 of stock in a custodial account. Next year he wants it back. He cannot have it.

💡 Key idea

Custodial: one custodian, one minor, irrevocable gift, minor's SSN, no margin. Entities prove who may act: trust document, corporate resolution, partnership agreement, court papers.

🧠 Why it matters

UGMA/UTMA custodial accounts: ONE custodian, ONE minor per account. Gifts are IRREVOCABLE: the assets belong to the minor, use the minor's Social Security number, and pass to the minor at the age of termination set by STATE law. The custodian manages prudently: no margin, no short sales. Example: an aunt may be custodian for her niece, but cannot add a second niece to the same account. TRUST accounts are run by a trustee; the firm verifies the trustee's authority in the trust document. CORPORATE accounts need a corporate resolution naming who may trade; a margin account also needs the charter or bylaws to permit margin. PARTNERSHIP accounts use the partnership agreement. ESTATE accounts are run by an executor or administrator, using court papers such as letters testamentary.

📈 In the real world

🏢 Rivera Tools, a fictional company, wants to open a margin account. The rep collects a corporate resolution naming the CFO as authorized trader and checks that the bylaws allow margin trading. Without both, the account stays cash-only.

📌 Takeaways

  • UTMA/UGMA: one custodian, one minor, gift is irrevocable
  • Age of termination is set by the state; the minor's SSN goes on the account
  • Corporations need a resolution; margin also needs charter/bylaw permission

📖 Terms in this lesson

UTMA / UGMA account: A custodial account for one minor with one custodian; gifts into it are irrevocable and belong to the minor.

✅ Test yourself

Whose Social Security number is used on a UTMA account?
  1. The donor's
  2. The parent's
  3. The custodian's
  4. The minor's

Answer: D · The minor's

The assets belong to the minor, so the minor's tax ID is used. The custodian only manages the assets, and the donor gave up ownership when the gift was made.

Which action is NOT permitted in an UGMA account?
  1. Buying a blue-chip stock
  2. Buying a municipal bond
  3. Reinvesting fund dividends
  4. Selling stock short

Answer: D · Selling stock short

Custodians must act prudently, and short selling (like margin) is not allowed in custodial accounts. Buying stocks or bonds and reinvesting dividends are ordinary prudent actions.

What document shows who may trade for a corporation's account?
  1. A trust agreement
  2. A corporate resolution
  3. A limited power of attorney
  4. Letters testamentary

Answer: B · A corporate resolution

A corporate resolution names the officers authorized to act. Letters testamentary are for estates, trust agreements for trusts, and a POA is used by individuals.

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