1 Colo.Law. 9
1972, June, Pg. 9.
Bank Accounts for Minors
9Vol. 1, No. 8, Pg. 9
Bank Accounts for Minorsby Jack W. SwansonJack W. Swanson is a Trust Officer with the United Bank of Denver National Association. He is a member of the Denver and Colorado Bar Associations.The law presumes the minor has no contractual capacity except for necessaries and therefore cannot effectively manage or dispose of his own property. This presumption exists to protect the minor from persons who could take advantage of him, as well as to protect the minor from his own imprudent acts. Bank accounts and savings and loan association accounts, however, have become a major exception to the general rule.
Because a minor may manage this type of asset, while at the same time lack capacity in other areas, it is common to find the name of a minor used in various ways in account headings. The legal relationships and tax results are fairly well defined in the case of an account solely in the name of a minor, but beyond this, there can be pitfalls for the unwary minor, parent, bank, guardian or executor.
The following presents some of the advantages, tax aspects and problems which can arise when a minor's name appears on either a bank account or savings and loan association account. Both of these types of accounts will be referred to as simply "bank accounts" unless otherwise noted.
Bank Accounts Solely in Minor's NameUnder common law a minor may deposit funds in a bank in his own name. He also has the right to draw on the account. The fact that he is a minor does not prevent him from dealing with this property, and the institution paying the deposit assumes no risk owing to the minor's civil disabilities. This modification to the general rule governing minors' contracts arose from the practical necessity to allow the minor to put funds in a safe place. To prevent their withdrawal would be self-defeating. Most states, including Colorado, now have statutory provisions more or less codifying the common law.(fn1)
Most institutions authorize these accounts regardless of the age of the minor, but require that the minor understand the nature of a bank account and be able to sign his name before they will permit withdrawals from such an account. To allow the minor to withdraw before fully
10understanding the nature of the act could result in the institution's incurring liability.(fn2)Besides merely providing safekeeping, such accounts permit the minor to save his own funds and, hopefully, learn some of the basics of money management.
The major disadvantage of these accounts arises when the minor, thought to possess at least some prudence, squanders his money or loses it through other means. As long as the bank has accepted the minor's signature as the only authority for withdrawals, the account is subject to his complete and sole control, unless a property guardian is appointed. If the minor should show signs of indiscretion, the parent could be appointed guardian and would then have the authority to take possession of the account.
There may be situations which call for an account to be opened in a minor's name before he is old enough to draw on the account.(fn3) It is possible to run into a problem in establishing such an account since many institutions will not permit an account for a minor until they are satisfied he is old enough to make withdrawals. This could be due to the institution's procedural inability to handle accounts upon which no person is authorized to sign.
Uniform Gifts to Minors ActAlthough the Uniform Gifts to Minors Act was enacted to simplify making gifts of securities to minors, it can be used for gifts of cash. To facilitate this, the Act specifically provides for creating the custodial bank account.(fn4) Once an account has been titled in the exact name-style set forth in the Act, the account becomes subject to all of the provisions of the Act. In this case, however, the minor has no right of withdrawal since this right is in the custodian.
The legal relationship created by the Uniform Gifts to Minors Act fails to come within any previously existing concept. Both legal and beneficial titles are in the minor, but the custodian has the duty to invest the property as would a "man of prudence." The custodian may apply either income or corpus in his discretion for the support, maintenance, education and benefit of the minor. When the minor becomes twenty-one years of age...