Acustodial account is a financial account (such as abank account, atrust fund or abrokerage account) set up for the benefit of abeneficiary, and administered by a responsible person, known as alegal guardian or custodian, who has afiduciary obligation to the beneficiary.[1]
Custodial accounts come in a number of forms, one being an account set up for aminor, since the minor is under the legalage of majority. The custodian is often the minor's parent. In the U.S., this type of account is often structured as aCoverdell ESA, allowing for tax-advantaged treatment of educational expenses. Another form is atrust account owned by an individual or institution, managed by a named party for purposes of rapid distribution of funds in that account. This is commonly used for petty cash, or for transactions that have very limited and clearly defined payees and transaction types. For example, law firm accounting includes trust accounts for disbursing funds entrusted to the law firm by each client for the client's benefit.
In the United States, theUniform Transfers to Minors Act provides for the possibility of bank accounts, brokerage accounts, and other property to be held in a custodial capacity under the Act so that the custodian has the right to control the property but that legal title is deemed to be in the minor for many purposes.
In the United States Brokerage account agreements under Article 8 of theUniform Commercial Code create a legal relation known as "custodianship", which is distinguished from the traditional concept of a trust.
For example, in the context of theIndividual Retirement Account (IRA), a brokerage firm distinguishes its custodial account IRAs from trust IRAs when seeking IRS tax approval for an IRA plan which is part of a brokerage account agreement. The treatment of a brokerage account based IRA as a trust for tax purposes is largely a legal fiction.
If Article 8 is set aside and the brokerage account is considered purely under principles ofcommon law, there is a possibility of construing the collection of brokerage accounts in the intermediated custodial holding chain as a collection of directed agency nominee trusts. According to this legal theory, each securities position with respect to a particular class of securities which appears in the brokerage firm's omnibus securities account is a trust fund for the benefit of customers sharing participation in that position. To exactly what extent the operation of such a theory would be restricted by Article 8 and theSecurities Investor Protection Act in future litigation is not obvious, and is perhaps irrelevant as a practical matter because of the level of detail in the legislation mentioned.[citation needed]
The trustee of anominee trust, being a directed agent of the beneficiaries, cannot even bind the trust estate to a debt in a capacity that is sufficiently separate from the capacity of the beneficiaries to contract the same debt themselves. For this reason, thenominee trust is not a debtor-person for bankruptcy purposes and therefore cannot obtain bankruptcy protection like it were a corporation. This is one reason why nominee trusts are not considered to be actual trusts by some lawyers.[2]
In theUnited Kingdom, principles of common law operate with greater freedom in relation securities custody. A securities intermediary is naturally characterized as a trustee[3] for the benefit of clients holding interests in those securities.