Question

Explain the distinction(s) between custodial funds and trust funds. What financial statements are prepared for each?

Answer 1

Answer:

Custodial fund- It is a financial account, set up for the benefit of the beneficiary. It has a specific purpose. In a custodial arrangement, the account is owned by the beneficiary and is entitled to the money upon reaching the proper age. When child becomes adult, he/she can use that money anyway on paying college fees or buying something.

Trust fund- It is an account in which trust company holds funds to pay for insurance premium or property taxes. In this account, assets are owned by the Trust. It provides the person giving money with a great deal more control. It has many restrictions and requirements.

Difference between the two- Custodian accounts is flexible while many trust accounts are not flexible. Setting up trust account can be costly and expensive as compare to custodial account. Trust allows a significant degree of control, in case of custodial, it is not so. The investment choice is custodial account is limited, the account is restricted to the mutual funds and similar investment types.