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Question

Difficulty: MediumCustomer Account Types and Ownership Structures

A registered representative is opening a new custodial account under the Uniform Transfers to Minors Act (UTMA) for a minor child, with the child's uncle designated as the custodian. Which of the following statements regarding the legal structure, tax reporting, and operational rules of this custodial account are correct?

  1. The assets deposited into the account represent an irrevocable gift, and beneficial ownership belongs entirely to the minor child under the child's tax identification number.Answer
  2. The account registration is restricted by rule to exactly one custodian and one minor beneficiary.Answer
  3. C
    If the custodian dies prior to the minor reaching the age of majority, the account assets automatically transfer into the deceased custodian's personal estate for probate settlement.
  4. D
    SIPC insurance guarantees the account against investment losses caused by declining market values of equities held in the portfolio.

Answer

The statements confirming that assets belong irrevocably to the minor under their tax identification number and that the account is restricted to one custodian and one minor are correct.
Custodial accounts established under UGMA/UTMA require exactly one custodian and one minor beneficiary. All contributions into the account are irrevocable gifts where beneficial ownership resides solely with the minor child, and tax obligations are tracked using the minor's tax identification number.

Step-by-Step Solution

1
Analyze beneficial ownership and tax status of UGMA/UTMA custodial accounts.
Assets given to a custodial account are irrevocable gifts where legal beneficial ownership belongs to the minor child, with earnings reported under the child's tax ID.
UGMA/UTMA regulations establish that the minor is the owner, while the adult custodian merely exercises management authority.
2
Evaluate account registration limits.
The registration format requires exactly one adult custodian and one minor beneficiary per account.
Joint custodians or multiple minor beneficiaries under a single custodial account registration are prohibited.
3
Evaluate survivorship and estate implications upon custodian death.
The custodian's death does not cause assets to enter the custodian's estate because the assets are already legally owned by the child.
Assets belong to the minor, so a replacement custodian is designated without probate involvement.
4
Evaluate regulatory protection coverage (SIPC vs. Market Risk).
SIPC safeguards against broker-dealer financial failure, not portfolio market losses.
Market fluctuations are investment risks borne by the account owner.

Key Concept

UGMA/UTMA Custodial Account Ownership and Rules
Estimated Time:1m 30s
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Topics

Customer Account Types and Ownership Structures