One way to help a child get a head start in life is through a custodial account. This type of account allows an adult to act as the caretaker of a child's investments. Opening a custodial account can help a child realize the benefits of compound interest and potential investment growth over a significant amount of time.

The account's assets are to be used exclusively for the child's benefit. They are usually invested with goals such as a college education or owning a home in mind. Assets may be used to pay interim expenses, as long as the expenses are not considered a parental obligation such as food, clothing or rent.

Gifts contributed to a custodial account are irrevocable and become the properly of the child when they are transferred. Donors should be certain of their gift before transferring assets to the account. No limit is set on the values of assets that may be transferred to the account. The child receives complete control of the assets when becoming an adult. The age of majority varies by state, but falls between 18 and 21 years of age.

The custodian must act as a prudent person with the best interests of the child in mind when making decisions regarding the child's account. The custodian is responsible for all paperwork and recordkeeping for the account until the account is turned over to the child. Only one custodian and one minor are allowed per custodial account and the Social Security number of the child will be used for the account.

Should the custodian die or become disabled, a successor will be named in the custodial agreement, or must be made in accordance with the applicable state rules set forth in the Uniform Transfers to Minors Act or the Uniform Gifts to Minors Act, which govern custodial accounts.

As the investment vehicles in the account increase in value or possibly receive dividends, income and capital gains taxes will be due. The child must generally pay taxes due on income earned in a custodial account. The age of the child and the total unearned income will determine the tax rate.

Custodial accounts can help children learn the responsibility of stewardship and the value of investing and saving. If you are leery of turning the assets of the account over to your child free and clear when they attain the age of majority, then a different type of arrangement will be better suited for your needs.

Each state has enacted legislation that makes these accounts available but not every state's legislation is the same. It is important to seek the guidance of your Northwestern Mutual Financial Network Representative* for additional information about these types of accounts and to learn whether this savings and investment option may be right for you.