How to Create Generational Wealth: Custodial Brokerage Account Edition
Imagine it’s your kid’s birthday – the big one; they’re an adult – and instead of handing them a bill for their first month’s rent or a barely functional used car, you hand them a brokerage account packed with years of carefully invested wealth. Money that has been compounding since they were in diapers. Money they can use to buy a home, start a business, or continue growing into their own legacy.
For many of us, this kind of generational wealth was never an option. Maybe your parents never invested because they were too busy surviving. Maybe you never got the financial head start that wealthier families take for granted.
But here’s the thing: you can be the one to break that cycle. You can be the first in your family to pass down not just money, but financial security and knowledge. And the best part? A custodial brokerage account lets you do this in a way that’s tax-advantaged, flexible, and set up for long-term growth.
Related: How to Create Generational Wealth: Roth IRA Edition (with Cold, Hard Numbers)
In this article:
What Is a Custodial Brokerage Account?
Why You Should Consider Opening a Custodial Brokerage Account
How to Open a Custodial Brokerage Account
Taxes: Who Pays and How Much?
The Fine Print
What Is a Custodial Brokerage Account?
A custodial brokerage account is basically an investment account you open for your child, where you control the funds until they hit adulthood (usually 18 or 21, depending on the state). These accounts operate under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), depending on your state.
Unlike a 529 college savings plan, which locks the money in for educational expenses, a custodial brokerage account has no such restrictions. Your kid can use it for college, a down payment on a house, starting a business, or blowing it all on a vintage Pokémon card collection (not recommended).
The key takeaway? You’re in charge of managing the money until your kid becomes a legal adult, at which point the money is theirs, no strings attached.
Related: Day Trading for Parents: How to Make Money During Naptime
Why You Should Consider Opening a Custodial Brokerage Account
This is generational wealth-building 101. A custodial brokerage account allows you to invest in stocks, ETFs, and mutual funds on behalf of your kid, meaning their money starts growing early—way earlier than most people even think about investing. Compound growth doesn’t care if the investor is 8 months old or 18 years old; it just keeps working.
Here’s why you should be paying attention:
Time is money. The earlier you start investing, the more time compound growth has to do its thing.
More flexibility. Unlike a 529 plan, this money isn’t limited to tuition. Your kid can use it for whatever their future self needs.
Teach financial literacy early. Your kid gets a front-row seat to how money grows when invested instead of wasted on overpriced crap from TikTok shop.
Potential tax advantages. The first $1,300 of unearned income (dividends, capital gains) is tax-free, and the next $1,300 is taxed at the child’s tax rate (which is usually lower than yours). Beyond that, it gets taxed at the parents’ rate, so you do need to keep an eye on gains.
Related: Life Insurance and Financial Support: A Guide for Parents
How to Open a Custodial Brokerage Account
1. Choose a Brokerage
Fidelity, Schwab, Vanguard, and other big names all offer custodial brokerage accounts. Look for one with zero or low fees, a user-friendly platform, and solid investment options.
2. Gather the Necessary Info
You’ll need your child’s Social Security number, your own personal info, and a funding source (like your bank account).
3. Fund the Account
There’s no minimum investment required, but the earlier you start, the better. Even $25 a month adds up over time.
4. Pick Your Investments
Think long-term: broad market ETFs (like VOO or VTI), blue-chip stocks, and index funds. Skip the meme stocks and get-rich-quick schemes—your kid’s financial future isn’t a casino.
5. Monitor and Educate
Show your kid the account as they grow up. Let them see how money grows with patience and smart decisions. By the time they take control, they’ll (hopefully) be responsible enough not to cash out for a luxury car they can’t afford to insure.
Taxes: Who Pays and How Much?
Taxes on custodial brokerage accounts aren’t as scary as they sound, but you do need to know the basics.
While the Account is Under Parental Control:
The child is the owner of the assets, but any income generated (dividends, interest, capital gains) is taxed under kiddie tax rules.
The first $1,300 of unearned income (investment income) is tax-free.
The next $1,300 is taxed at the child’s tax rate (which is likely very low).
Anything beyond $2,600 is taxed at your (the parent’s) tax rate.
Once the Child Takes Over the Account:
When the child reaches the age of majority (18 or 21, depending on the state), they become the legal owner and are responsible for all tax liabilities.
Long-term capital gains (investments held for over a year) are taxed at 0%, 15%, or 20%, depending on their income bracket. If they’re in a low-income bracket, they could pay 0% on gains.
Short-term capital gains (investments held for less than a year) are taxed as ordinary income, which could be higher than long-term capital gains.
If they continue to invest rather than cash out, they can further control their tax liabilities with smart withdrawals and tax-efficient investing.
Related: Tax Tips to Help You Survive 2025
The Fine Print
A few things to keep in mind:
Once you put money in, it’s legally your child’s—it’s not a backdoor savings account for you.
When they reach adulthood, they take full control. No take-backs.
If your kid gets a significant balance, it could impact their eligibility for financial aid when applying to college.
Investment gains are taxed, so plan accordingly.
If you’re serious about building generational wealth, a custodial brokerage account is a powerful tool. It’s a way to pass down not just money, but knowledge—teaching your kids to invest, grow wealth, and make smart financial choices. Because the best inheritance you can give isn’t a lump sum; it’s the ability to build wealth on their own.
So, set it up, fund it, and teach your kid what Wall Street doesn’t want them to know—how to make money work for them, instead of the other way around.
