Yes, you can open a savings account for your grandchildren, but the account structure depends on their age and your role

If your grandchildren are minors, you have three main paths: open a custodial account in their name with yourself as custodian, open a regular savings account in your own name and earmark the money for them, or add them as an authorized user on your account once they reach a certain age (usually 13 or older, depending on the bank). Each approach has different tax consequences, control implications, and rules about who can withdraw the money and when.

If your grandchildren are adults, you can simply help them open their own account, or you can add them as a joint account holder on an account you control. The choice matters because it affects what happens to the money if you die, whether they can access it without your permission, and how it's taxed.

Key Takeaways

  • A custodial account (UTMA or UGMA) is held in your grandchild's name with you as custodian, and the money legally belongs to them once they reach the age of majority (18 or 21, depending on your state).
  • Money you deposit into a custodial account may trigger gift tax reporting if you give more than $18,000 per person per year (the 2024 limit), though you typically won't owe tax unless you've already used your lifetime exemption.
  • A regular savings account in your name that you intend for your grandchildren does not legally belong to them and will be part of your estate if you die, unless you name them as a beneficiary.
  • Adding a grandchild as a joint account holder gives them immediate access to withdraw money, which can create problems if you later become incapacitated or die.
  • Banks have different minimum deposit requirements and age restrictions, so you'll need to contact your bank directly to learn what accounts they offer for minors.

Custodial accounts: the most common choice for grandchildren

A custodial account is a savings or investment account opened in your grandchild's name, with you named as the custodian. You control the account while they're a minor, but the money legally belongs to them. When they reach the age of majority in your state (usually 18 or 21), the account transfers to their control automatically, and you no longer have any say over how they use it.

Custodial accounts come in two forms: UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gifts to Minors Act). UTMA is newer and available in all 50 states; UGMA is older and not available in all states. For a savings account, the difference is minimal—both let you deposit money and let the child inherit it at majority. Your bank will tell you which one they offer.

To open a custodial account, you'll need the grandchild's Social Security number, their date of birth, and your own identification. Some banks require the grandchild to be present; others do not. Call your bank ahead of time to ask what they need and whether they have a minimum deposit.

Gift tax and annual contribution limits

The IRS allows you to give up to $18,000 per person per year (as of 2024) without filing a gift tax return. This limit applies to each grandchild separately, so you could give $18,000 to one grandchild and $18,000 to another in the same year without triggering any reporting. The limit increases slightly most years to account for inflation.

If you give more than $18,000 in a single year to one grandchild, you must file Form 709 (Gift Tax Return) with the IRS, even if you don't owe tax. The excess amount counts against your lifetime gift and estate tax exemption, which is currently $13.61 million (as of 2024). Most people never hit that lifetime limit, so filing the form is usually a formality rather than a tax bill.

These limits apply only to gifts you make during your lifetime. Money you leave to grandchildren in your will or through a beneficiary designation is not subject to the annual gift limit, though it may be subject to estate tax if your total estate exceeds the exemption amount.

Accounts in your name versus accounts in their name

If you open a savings account in your own name and deposit money you intend for your grandchildren, that money is legally yours, not theirs. You can withdraw it anytime, and your grandchildren cannot access it without your permission. This gives you complete control, but it also means the money will be part of your estate when you die and may be subject to probate or estate taxes.

To make sure the money reaches your grandchildren after you die, you can name them as beneficiaries on the account. Most banks allow you to name a beneficiary for free. When you die, the bank will transfer the account balance directly to the named beneficiary, bypassing probate. This is simpler than leaving the money in your will, and it happens faster.

The downside of keeping the account in your name is that if you become incapacitated (due to illness or injury), your grandchildren cannot access the money without a power of attorney or court order. A custodial account avoids this problem because the money is already in their name.

Joint accounts and authorized users

Some banks allow you to add a grandchild as a joint account holder, which means they have equal legal rights to the account and can withdraw money without your permission. This is different from being an authorized user, which some banks offer as an alternative. An authorized user can make withdrawals but does not own the account.

Joint accounts are simple to set up and give your grandchild immediate access to the money, which can be useful if they need to withdraw funds while you're away or incapacitated. However, joint accounts create problems if you later become incapacitated or die. If you become incapacitated, your grandchild can still withdraw money, which could lead to disputes with other family members. If you die, the joint account passes to your grandchild automatically, which may not be what you intended if you have other heirs.

For these reasons, custodial accounts are usually a better choice than joint accounts for saving money for grandchildren. If you want to give your grandchild access to money in an emergency, you can name them as a beneficiary on a regular savings account in your name, or you can give them a power of attorney to act on your behalf if you become incapacitated.

Tax implications for the grandchild

Money you deposit into a custodial account is not taxable income to your grandchild. However, if the account earns interest or investment returns, those earnings may be taxable. The tax rules depend on the grandchild's age and the amount of earnings.

For 2024, a minor can earn up to $1,300 in unearned income (interest, dividends, capital gains) before owing any federal income tax. Earnings above that amount are taxed at the child's rate up to $1,300, and then at the parent's rate for anything above that (this is called the "kiddie tax"). The exact thresholds change each year, so check the IRS website or ask a tax professional if the account will earn significant interest.

For a simple savings account with a low interest rate, the tax impact is usually minimal. But if you're investing the money in stocks or bonds, or if you're depositing large amounts that will earn substantial interest, talk to a tax professional about the best account structure.

What happens when your grandchild reaches adulthood

When your grandchild reaches the age of majority in your state (18 or 21, depending on whether the account is UTMA or UGMA and your state's rules), the custodial account automatically transfers to their control. You no longer have any authority over the account, and they can withdraw the money and use it however they want.

This is an important consideration if you're saving money for a specific purpose, like college. Once the account transfers to your grandchild's control, they could withdraw the money and spend it on something else. If you want to ensure the money is used for a particular purpose, a custodial account may not be the right tool—you might instead consider a 529 college savings plan, which has restrictions on how the money can be used, or leaving the money in your will with instructions for how it should be spent.

Frequently Asked Questions

Do I need the grandchild's permission to open a custodial account?

No. As the custodian, you can open the account without the grandchild's knowledge or consent. However, you will need their Social Security number and date of birth. Some banks require the grandchild to be present in person; others do not.

What happens to a custodial account if I die before my grandchild reaches adulthood?

The account remains in the grandchild's name and is held in trust until they reach the age of majority. Your will or trust can name a successor custodian to manage the account, or the court can appoint one. Without a named successor, the court will decide who manages it.

Can I withdraw money from a custodial account if I need it?

Technically, you can withdraw money as custodian, but it must be used for the grandchild's benefit—education, medical care, living expenses, and similar needs. Withdrawing money for your own personal use is a violation of your fiduciary duty and could create legal problems. If you need access to your own money, keep it in an account in your name instead.

Will a custodial account affect my grandchild's financial aid for college?

Yes. Custodial accounts are counted as the student's asset on the Free Application for Federal Student Aid (FAFSA), which can reduce their may be able to access for need-based aid. A 529 college savings plan has more favorable treatment under the FAFSA rules, so if college funding is your goal, ask a financial advisor about that option instead.

Can I open a custodial account at any bank?

Most banks and credit unions offer custodial accounts, but not all do. Call your bank and ask whether they offer UTMA or UGMA accounts, what the minimum deposit is, and what documents you'll need to bring. Online banks sometimes have lower minimums and simpler processes than brick-and-mortar banks.