The term custody account is often used as an alternative for custodial account. A custodial account is one which is opened for a child or minor, but which is managed by an adult. The custodian is usually the minor’s parent or legal guardian. Should the child wish to engage in securities transactions, the approval of the custodian is required. Such accounts can be mutual funds accounts, savings accounts which have been created for the minor by the custodian, or other financial products specifically offered for this purpose by the bank or investment company.
In the United States, the creation of custodial accounts falls under the Uniform Gifts to Minors Act. This makes way of ownership of securities by minors. Under this act, the minor may receive assets without the need for the creation of a special trust fund. The only difference between the custody account and any other account is the need for a custodian to manage the account before the minor reaches legal age.
On the other hand, the term custody account may also refer to an account which is held by an institution but is being managed by a custodian. This arrangement is governed by a written agreement between the account holder and the bank. The bank may perform a variety of functions, as stated in the agreement. For instance, it may be in charge of the collection of dividends and interest, as well as the purchase of additional securities. The custodian must also provide the account holder with pertinent information on payments and dividends in the form of a statement.