Despite the age restriction laws, investing at a young age or for young ones is definitely possible. There are alternatives to investing for minors whether you’re a parent/guardian wanting to invest in stocks for your children, or you’re an earning minor who wants to invest in stocks yourself. This can be done in two ways: custodial accounts and trust funds. More on that later.
Just the Nuggets
- According to the law, a minor can only buy their own stocks once they reach the age of majority. Depending on the state or country, this ranges between 18 and 24, with 18 years being the most common.
- Investing for minors can be done through custodial accounts and trust funds.
- In a custodial account, the parent opens and manages the investment account until the minor becomes an adult.
- A trust fund consists of three parties: grantor, trustee, and beneficiary. The parent as a grantor has more control in a trust fund than in a custodial account.
- A trust fund can be revocable or irrevocable. A revocable trust is more flexible because terms can be altered anytime unlike in an irrevocable trust.
3 Reasons Why Age Matters
Anyone can own stocks no matter what age. However, buying stocks is another matter. You would have to be of legal age before you can buy stocks.
Poor Investing Decisions
How would you feel if you let your toddler use real money to buy shares of Google or Apple? You would feel more at ease if it’s done under your supervision at least, right?
It’s a widely-accepted opinion that minors are prone to making poor investing decisions. It’s because they are young and could arguably let their emotions determine their decisions. This is not always the case. Even adults can make poor investing decisions. However, it is assumed that minors are not mature enough to shoulder liabilities.
Liability to Stockbrokers
Stockbrokers are government-approved gateways for stock buying. Unless you buy directly from companies selling their shares, you can only enter the stock market through the brokers. If a broker allowed a minor to open an account without the consent of their legal guardian, they would face a shut down by the government.
Law Requirements for Binding Contracts
Stockbrokers are government-approved gateways for stock buying. Unless you buy directly from companies selling their shares, you can only enter the stock market through the brokers.
Minimum Age Requirement for Buying Stocks
The legal stock trading age is based on the age of majority—the age when a person becomes an adult and is no longer considered a minor. The adult will now be able to acquire and exercise full legal rights and also be held responsible for contractual liabilities.
The age of majority varies by geographical location based on their enforced state laws. In general, it ranges between 18 and 24—with 18 years being the most common.
United States of America
All states have an age of majority of 18 years old, except Alabama (19 y/o), Nebraska (19 y/o), and Mississippi (21 y/o).
The age of majority is 18 years old.
The age of majority in all Australian states and territories is 18 years old.
The age of majority varies between 18 and 19 years old, depending on the provinces and territories.
According to the Births and Deaths Registration Amendment Act of 2001, the age of majority is 18 years old.
Although the age of majority in Singapore is 21 years old, minors at 18 years old can already enter a contract.
A custodial account is where a parent opens and manages an investment account for a minor. In the absence of a parent, a legal guardian would assume the parent’s role. Any stocks bought by the parent will be owned by the minor. Once the minor reaches legal age, the custodial role ceases. By that time, the child has full control of the account.
Custodial accounts go by different names and have their own respective guidelines, depending on the state or country. If you’re an American, you may be familiar with the Uniform Gift/Transfer to Minors Act (UGMA/UTMA). In the UK, they call them Junior Stocks & Shares ISAs (Individual Savings Accounts). Meanwhile, in Canada, they refer to them as In Trust For (ITF) accounts (or Informal Trusts). Despite the differing names, they essentially work on the same basis.
- Hassle-free account setup, usually online. It would only require a few minutes and a debit card.
- The account ownership transfer is either automatic or smoothly facilitated by the account providers.
- The money can be withdrawn only for the benefit of the minor. In some countries, the money is untouchable until the minor is of legal age.
- Having full control over the money upon legal age, no one could restrict the child from using the money for whatever purpose.
How to Open a Custodial Account
Opening a custodial account varies mainly on the procedures of the account providers, such as banks and stockbrokers.
1. Choose an account provider
You can invest in stocks through various financial institutions like banks, mutual fund managers, or stockbrokers. Conduct background research of account providers in your state or country. See to it that they are licensed to operate by government agencies that oversee financial institutions. Compare and contrast their fees and unique offers.
2. Prepare the requirements
For online stockbrokers, the common requirements are identification numbers and a debit card. The identification numbers will vary from place to place. Examples include a tax identification number (TIN) and/or a social security (SS) number.
3. Sign up for an account
The process is straightforward and easy, but it will depend on your chosen account provider. Generally, they will ask for your personal information, account features, preferences, and finally, a starting fund for your account. This would easily take a few minutes online with a debit card.
4. Start investing
Once you’ve funded your account, put your plan into action, and make sure your minor is right there with you. The goal here is to teach them financial education. The most effective way to do this is to teach by example. Just take it slowly at a time. Discuss what stocks you would like to invest in and why.
Stockpile (for the US market) is a great way to start handing responsibilities to your children. Kids or teens can place stock trades anytime upon the parent’s approval. They even have a wishlist of favorite stocks they can share with family members. At a young age, it’s wise to instill a money mindset within your minor.
A trust fund is an investment account opened by a parent for the minor. The parent may manage the account themselves or assign another trustee—a person or institution that manages the account for them. However, the stocks in the account are not owned by the minor, yet. It would only be theirs once the contract terminates, as determined by the parent.
Think of a trust fund as a premium version of a custodial account. The limitations of the custodial account could very well be adjusted by a trust fund. This is in terms of how and when the stocks will be transferred and used by the minor in the future. But just like a premium account, more features would cost more.
- The parent has more control over the terms and conditions laid out in the contract.
- Since the minor does not own the stocks yet, he has more eligibility for financial aid.
- The parent can specify how the beneficiary—the person who will receive the benefits (in this case, the minor)—should spend the money in the future.
- The process of making a trust fund is complicated and expensive.
- You must have an attorney to make the contract official.
How to Open a Trust Fund
1. Set the purpose of the trust fund and your preferred conditions
There are various types of trust funds according to their purpose. Unlike a custodial account, the parent can specify the purpose of the trust fund (e.g. college fund, marriage, housing, business, etc.). The parent can also decide on how the trust fund will terminate—either transferred to the minor at a specific age or upon their passing.
2. Assign the parties of the trust
Three parties are involved in a trust fund: grantor, trustee, and beneficiary.
The grantor, who creates and sets up the trust, is usually the parent. Other synonymous names are donor, contributor, settlor, or trust maker.
The trustee, who manages the account (e.g. buying and selling of stocks), may be the parent themselves. They could also be more than one person or in some cases, a financial expert or institution. This would depend on your budget and level of expertise.
Lastly, the beneficiary, who receives the benefit of the trust, is the minor.
3. Decide if the trust is revocable or irrevocable
In an irrevocable trust, terms cannot be altered anytime.
A revocable trust is more flexible because terms can be altered anytime, and the parent can own and manage the stocks at the same time.
Hire an attorney to get professional advice on how to lay the arrangements you’ve made into a legal document called the deed of trust. Ask for referrals from family, friends, or trusted financial institutions. Opening a trust fund is costly due to the need for a legal expert to formalize the agreement.
|REVOCABLE TRUST||IRREVOCABLE TRUST|
|Parent (as Grantor) owns the stocks||✓||✗|
|Parent (as Grantor) has control over the stocks in the trust||✓||✗|
|Terms of the trust can be altered anytime||✓||✗|
|Parent can both be the Grantor and Trustee at the same time||✓||✗|
4. Acquire the legal documents
The cost of setting up a trust fund in Los Angeles, for example, may range from $500 to $3,000 or an hourly rate of $350. Meanwhile, in the UK, the setup can cost around ￡1,000. Insurance firms in Singapore may price the setup from $1,000 to $4,500. It’s best to contact your local financial institutions to get an accurate price estimate.
With the advice of your attorney, have the documents signed and notarized.
5. Register your trust fund
Just like how a business must have a TIN, a trust document must have a trust number. Once your trust documents are ready, put it into the official records through your appropriate government agency. Take the Internal Revenue Service (IRS) in the US as an example.
6. Take your trust documents to an account provider
The outputs you acquired during the process will be requested by your chosen account provider. You can set up an account online with financial institutions. Once your documents are ready, you can finish the application process as fast as 10 minutes.
7. Start investing
If your goal is to teach financial education to your children, then the revocable trust fund would be more effective. You can invest as you would with a custodial account. But if you have someone that does it for you, an irrevocable trust would be more convenient. Although expensive, you would be more confident that the investments made in your account are backed by professional experience. Consider at least putting your trustee and beneficiary in some kind of mentor-student relationship to create a money mindset for your minor.
Whether it be a custodial account or a trust fund, the important thing is you guide your children on how to invest starting at a young age.
Our References and Further Readings