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What is a Custodial Agreement?
A custodial agreement is a legal contract between the owner of assets or property and a nominee that agrees to hold the assets or property on behalf of the owner.
Companies usually enter into custodial agreements to administer benefits to their employees like 401(k) plans or health savings accounts. Employees benefit from investment professionals acting as their custodians and managing their accounts.
The Custodian in a custodial agreement will handle a variety of tasks for the owner of the assets. Some tasks include:
- Physically holding equities and bonds
- Settling purchases and sales
- Reporting the status of assets
- Tax compliance
- Managing the client’s accounts and transactions
In some cases, a custodial agreement may be executed to control the assets of a minor or an incapacitated adult. Any legal adult can act as the Custodian for a minor or incapacitated person’s assets.
It is common for an adult to gift assets to a minor and manage the account as the Custodian until the minor becomes an adult. This is often done for tax benefits.
Custodial agreements are ideal for absentee owners who are not interested or able to be involved in the daily activities of their accounts and for complex financial transactions that require expert assistance.
For more information on custodial agreements, check out this article.
What is meant by Custodian?
When referring to a custodian in the context of a custodial agreement, a custodian is an institution or individual acting as an agent and exercising legal authority over someone else’s financial assets.
Custodian roles are often held by the following:
- Banks
- Law firms
- Accounting firms
Custodians can also be a company or any legal adult granted permission to handle assets or property on behalf of the owner.
How Custodial Agreements Work
Custodial agreements can work in various ways depending on the parties, the assets, and the agreement in place.
When the custodial agreement is for a benefits program like a 401(k), first, the Custodian will collect the funds from the employee. This is usually done through payroll deductions. The Custodian then invests the money on behalf of the employee. The Custodian collects a fee; however, this fee is generally lower than any fees the employee would pay as an individual investor.
The employee benefits from this custodial agreement because they receive professional advice, save time, and save money on fees.
Custodians will generally be required to:
- Report distributions made from the accounts to the IRS
- Withholding distribution to cover income taxes
- In the event the owner dies, liquidating the funds and distributing them to beneficiaries
What’s Included in a Custodial Agreement
Custodial agreements will differ depending on the client, assets, and Custodian; however, most custodial agreements will include the following sections:
Background: The background includes information about the client, the Custodian, the assets to be transferred, and the purpose of the custodial agreement.
Definitions: The definitions section defines terms that will be found throughout the agreement. This allows both parties to understand the contract thoroughly and avoids any confusion.
Appointment: In the appointment section, the client officially appoints the selected Custodian, and the Custodian agrees to perform all acts laid out in the contract.
Instructions: The client must provide written instructions to the Custodian for any actions the request. The contract should outline a minimum amount of time that the Custodian needs to receive instructions before the action must take place.
Delivery of Property: The agreement should outline what property will be delivered to the Custodian and how the delivery will take place. The client must also provide proof that they are the rightful owner of the property or assets in question.
Delivery of Documents: The client also must provide, upon request, any documents the Custodian needs to manage the account.
Representations, Warranties, and Covenants: In the custodial agreement, the client must agree that they will comply with all laws, rules, and regulations applicable under the contract.
Records: The client is entitled to copies of any documents the Custodian has pertaining to their assets or property. The agreement should lay out a minimum time the Custodian needs to present the records after receiving the request for documents.
Confidentiality: Custodial agreements are subject to privacy.
Indemnification: The custodial agreement will contain an indemnity clause in which the client agrees to hold harmless the Custodian for any losses, liabilities, or expenses in connection with specific actions as laid out by the agreement.
Duration and Termination: It is important for the agreement to state how long the contract will be valid and how to terminate it.
Signatures: Like any legally binding contract, a custodial agreement needs to be signed by all parties involved.
Image via Pexels by Tara
Examples of Custodial Agreements
Custodial agreements are more common than you may think. Some examples of custodial agreements include:
- Company retirement plan
- IRA account
- Health savings account
- 401(k) plan
A bank can act as a custodian by handling investments for a customer, like moving money into brokerage accounts, seeking out alternative investment opportunities, monitoring investment activities, and reporting account activity to the owner.
For an example of an actual custodial agreement, click here.
Key Terms in Custodial Agreements
The following is a list of key terms and definitions you may find in a custodial agreement:
Authorized Person. Refers to anyone the client authorizes to give instructions to the Custodian on their behalf.
Book-Entry System. The Federal Reserve Treasury book-entry system for the United States
Interests. Refers to shares, units, or any other interests that the customer has invested or plans to invest
Property. Property is a broad term that refers to all cash, securities, financial instruments, income, distributions, and proceeds that belong to the customer. This term also encompasses any other securities or investment items that the Custodian receives from the client.
SEC. The SEC is the United States Securities and Exchange Commission
Underlying Fund. Refers to any underlying funds or portfolios the customer has invested in or plans to invest.
Custodial Agreements FAQs
What is a custody fee?
A custody fee is the amount of money that a bank or other entity charges for managing an account on an owner’s behalf.
What is a financial record custodian?
A financial record custodian is a bank or other financial institution that agrees to hold a customer’s securities for safekeeping to prevent them from being stolen or lost. Assets may be held in electronic or physical form.
What is a qualified custodian?
The SEC defines a qualified custodian as a bank, broker-dealer, futures commission merchant, or any other entity that legally maintains a client’s funds and securities.
Why do you need a custodian?
A custodian’s responsibility is to hold assets on behalf of the actual owner. Custodians will perform various services like recording transactions, reporting activity to the IRS, and monitoring a client’s accounts.
Do I need to report custodial accounts on taxes?
No, the Custodian of an account does not have to report the account on their own taxes. If a parent is a custodian over a child’s account, that account will be reported under the child’s social security number.
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Michael M.
www.linkedin/in/michaelbmiller I am an experienced contracts professional having practiced nearly 3 decades in the areas of corporate, mergers and acquisitions, technology, start-up, intellectual property, real estate, employment law as well as informal dispute resolution. I enjoy providing a cost effective, high quality, timely solution with patience and empathy regarding client needs. I graduated from NYU Law School and attended Rutgers College and the London School of Economics as an undergraduate. I have worked at top Wall Street firms, top regional firms and have long term experience in my own practice. I would welcome the opportunity to be of service to you as a trusted fiduciary. In 2022 I was the top ranked attorney on the Contract Counsel site based upon number of clients, quality of work and top reviews.
Jeremiah C.
Creative, results driven business & technology executive with 24 years of experience (15+ as a business/corporate lawyer). A problem solver with a passion for business, technology, and law. I bring a thorough understanding of the intersection of the law and business needs to any endeavor, having founded multiple startups myself with successful exits. I provide professional business and legal consulting. Throughout my career I've represented a number large corporations (including some of the top Fortune 500 companies) but the vast majority of my clients these days are startups and small businesses. Having represented hundreds of successful crowdfunded startups, I'm one of the most well known attorneys for startups seeking CF funds. I hold a Juris Doctor degree with a focus on Business/Corporate Law, a Master of Business Administration degree in Entrepreneurship, A Master of Education degree and dual Bachelor of Science degrees. I look forward to working with any parties that have a need for my skill sets.
Ryenne S.
My name is Ryenne Shaw and I help business owners build businesses that operate as assets instead of liabilities, increase in value over time and build wealth. My areas of expertise include corporate formation and business structure, contract law, employment/labor law, business risk and compliance and intellectual property. I also serve as outside general counsel to several businesses across various industries nationally. I spent most of my early legal career assisting C.E.O.s, General Counsel, and in-house legal counsel of both large and smaller corporations in minimizing liability, protecting business assets and maximizing profits. While working with many of these entities, I realized that smaller entities are often underserved. I saw that smaller business owners weren’t receiving the same level of legal support larger corporations relied upon to grow and sustain. I knew this was a major contributor to the ceiling that most small businesses hit before they’ve even scratched the surface of their potential. And I knew at that moment that all of this lack of knowledge and support was creating a huge wealth gap. After over ten years of legal experience, I started my law firm to provide the legal support small to mid-sized business owners and entrepreneurs need to grow and protect their brands, businesses, and assets. I have a passion for helping small to mid-sized businesses and startups grow into wealth-building assets by leveraging the same legal strategies large corporations have used for years to create real wealth. I enjoy connecting with my clients, learning about their visions and identifying ways to protect and maximize the reach, value and impact of their businesses. I am a strong legal writer with extensive litigation experience, including both federal and state (and administratively), which brings another element to every contract I prepare and the overall counsel and value I provide. Some of my recent projects include: - Negotiating & Drafting Commercial Lease Agreements - Drafting Trademark Licensing Agreements - Drafting Ambassador and Influencer Agreements - Drafting Collaboration Agreements - Drafting Service Agreements for service-providers, coaches and consultants - Drafting Master Service Agreements and SOWs - Drafting Terms of Service and Privacy Policies - Preparing policies and procedures for businesses in highly regulated industries - Drafting Employee Handbooks, Standard Operations and Procedures (SOPs) manuals, employment agreements - Creating Employer-employee infrastructure to ensure business compliance with employment and labor laws - Drafting Independent Contractor Agreements and Non-Disclosure/Non-Competition/Non-Solicitation Agreements - Conducting Federal Trademark Searches and filing trademark applications - Preparing Trademark Opinion Letters after conducting appropriate legal research - Drafting Letters of Opinion for Small Business Loans - Drafting and Responding to Cease and Desist Letters I service clients throughout the United States across a broad range of industries.
Ayelet F.
Ayelet G. Faerman knows what influencers mean to brands today. With experience as legal counsel for a beauty brand for over 5 years, and overseeing multiple collaborations, Ayelet has experienced the rise of influencer marketing. As the founder and managing partner of Faerman Law, PA her practice focuses on influencer relations including a specialization in contract negotiations.
Benjamin E.
Benjamin is an attorney specializing in Business, Intellectual Property, Employment and Real Estate.
Richard G.
Attorney Gaudet has worked in the healthcare and property management business sectors for many years. As an attorney, contract drafting, review, and negotiation has always been an area of great focus and interest. Attorney Gaudet currently works in Massachusetts real estate law, business and corporate law, and bankruptcy law.
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Jonathan R.
I am a graduate of Cornell University and Rutgers University School of Law—Newark, and have been admitted to the state and federal bars for New Jersey, and have been engaged in the full- or part-time practice of law since my admission to the bar in 1991. My practice centers on civil litigation; wills, trusts, and estates; and ediscovery review and management. I have extensive experience in regulatory compliance in the financial services industry, as well as privacy laws in the U.S. and E.U.
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Hello, my name is David hatch I'm a Michigan licensed attorney. I have several years of experience with parenting time and custody issues. That appears to be what you're asking about. It would be helpful first to understand more about the situation. Like if there is a divorce decree and find some time order or any other type of order related to the children in the situation you're dealing with. Once I understand the situation I can help you determine a course of action.
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