What Is a Custodian?

In insurance, a custodian's role is to "protect and maintain" assets left to your minor child until adulthood. For example, if someone applying for term coverage names a minor beneficiary, they will be asked to name a custodian. If you die, the custodian must hand over the assets when your child reaches the age of majority. This is 18 in most states, but may be as high as 21.

A custodian's responsibilities include:

• Withdrawing assets for the minor's benefit, such as tuition, educational costs, or medical expenses
• Managing the overall custodial account in the minor's best interest, also called a "fiduciary" relationship
• Buying stocks, mutual funds, bonds, or other investment securities on the minor's behalf

Is a Guardian the Same as a Custodian?

Although the roles may seem similar, there are key differences. A guardian acts as a substitute parent if both parents die and is generally named in a will. A guardian has legal custody of a minor, so their influence extends beyond managing a policy payout. The same person can be named both custodian and guardian.

When Do You Name a Custodian?

You need a custodian when you have minor children and assets that may pass to them.

Under certain state laws, a minor may not legally own financial assets in their own name. This becomes an issue when you name a minor child as beneficiary of life insurance or in your will.

If you have minor children, a custodian helps ensure insurance proceeds or other inherited benefits, generally from a will, can be transferred according to your wishes. The Uniform Transfers to Minors Act (UTMA) allows a custodian to hold proceeds left to a minor until the age of majority.

An often-overlooked point: even a surviving parent does not automatically become custodian for your life insurance policy, even if named as that child's guardian in a will.

What Happens if You Do Not Name a Custodian?

Perhaps you cannot decide which sibling to choose, or simply do not want to hurt anyone's feelings. Wouldn't it be easier to choose no one? The short answer is no. Although the decision may be uncomfortable, failing to name a custodian can have serious consequences.

If your minor child is named beneficiary of insurance or other assets and you have not designated a custodian, the child may be unable to access them until adulthood. That is exactly the opposite of what you intended when buying insurance or leaving assets for your minor child's benefit, isn't it?

Another consequence is that a probate court may appoint a guardian for your child and allow that guardian to serve as custodian of the assets. Nobody wants this outcome: it is time-consuming, expensive, and leaves a critical decision to the courts.

Whom Will You Name as Custodian?

Now comes the potentially difficult part for a parent: choosing a custodian. Given the role and its importance in your child's life, this is not a trivial decision.

Your choice is personal and as unique as your family. Still, a few guidelines can help. It all begins with one word: trust. Do you trust this person with responsibility for something as priceless as your child's well-being?

Several candidates may immediately come to mind. Here are questions you and your partner can ask to narrow the list: Is this person financially knowledgeable? Would they be comfortable offering investment guidance and making financial decisions for your child? Do they have enough time to fulfill the responsibility? Do they want it? Some people do not, and it is better to know upfront.

How Do You Name a Custodian?

The logistics of naming a custodian for life insurance are simple. Tell your provider you want to name a custodian and establish a custodial account under UTMA, and the company will provide the required forms. Your estate planning attorney can help with custodial matters involving other assets.

Review your decision periodically. Circumstances change: you may no longer want the person you selected, or they may no longer want the responsibility. Perhaps an older child has reached adulthood and you would prefer them to act as custodian for a younger sibling. Whatever life brings, consider how it affects your custodial decision and review or update your plan regularly.

Today's Planning Is Tomorrow's Peace of Mind

Much of parenting means ensuring children feel loved, cared for, and safe at all times. That is why you are considering life insurance, perhaps a will, and probably why you read this article. Now that you know what a custodian is, how the role works, and how to choose one, you can relax. Just kidding—you have children under 18. You will not be relaxing for at least another decade or two.