Considerations When Banking Minors

There are several banking relationships that might involve minors. Be it an adult who wants their child to learn about finances through a deposit account or even a loan, a fourteen year old who just got their first job at the local grocery store, or a custodial account set up by Grandpa and Grandma for college savings, banking relationships involving minor customers is no minor matter. With that pun out of the way, this article will discuss the serious considerations that bank must make, depending on the nature of the account relationship. 
The first question that WBA often receives regarding minors is: can minors open an account? Or to phrase it more broadly: can minors enter into a contract? The answer to both is: yes, banks can do business with minors, including opening deposit accounts and extending credit. Minors can enter into a contract. However, a minor can escape liability under the contract. Meaning, a minor could avoid liability from a bank seeking to hold a minor accountable for terms under the contract. This means that while a bank can contract with minors, doing so presents unique risks and liabilities. 
The ability of a minor to escape, or void, liability under a contract is often referred to as the doctrine of incapacity. Generally speaking, the theory is that a minor has not developed enough to understand the significance of contracting and thus, may void the contract. It is also worth mentioning that a court could find that someone who has attained the age of 18, or older, still hasn't matured enough to understand that significance and might be permitted to void the contract. For the above reasons, banks should consult with their policies and procedures regarding contracting with minors. 

When setting such policies, banks should consider the risks associated with opening accounts for minors. This is a matter for every bank to decide, as a matter of business. Perhaps this means that the bank does not contract with minors. Or, perhaps the bank is willing to open accounts for minors, under certain circumstances, and does so on a case-by-case basis. The bank might also find a compromise and require an adult joint owner. The theory of joint ownership would be that even if the minor can void the contract, the bank might be comfortable seeking to hold the adult liable, if the account agreement provides for joint and severable liability. Again, this is a matter that the bank must decide based upon how comfortable it is entering into contract. 

When it comes to minor accounts, WBA generally recommends that banks consider the use of a WUTMA account. A WUTMA account is created under Wisconsin’s Uniform Transfers to Minors Act, which provides certain requirements, procedures, and responsibilities. Thus, it creates a means for a bank to open an account with an understanding of what rules apply to the relationship between the minor, the adult custodian, and the bank. While WUTMA provides for this certainty, banks should be careful before opening custodial accounts which are not governed by WUTMA, as it would leave questions as to how the account would be handled. 

WUTMA describes certain types of transfers which may be made under the Act. Generally speaking, it is the custodian’s responsibility to understand the nature of the transfer, and when the funds should be released to the minor, not the bank’s. That said, there may be certain situations that a bank may need to evaluate. For example: payroll. Because payroll is income, it would not be appropriate for payroll to be deposited to a WUTMA account. 

Additionally, payment to a beneficiary who is a minor payable on death (P.O.D.) beneficiary must be done under WUTMA. Thus, banks must be aware that if a minor is named as a beneficiary, then upon death of the owner(s) of the account, the transfer must be made under WUTMA. If a custodian is not named, or is deceased with no successor custodian, then in most situations, a specific procedure must be followed. Generally speaking, in such a situation, if the minor has attained the age of 14, he or she may appoint a custodian within 60 days. If there is no custodian or successor custodian and the minor is not 14 or did not appoint a conservator within 60 days of the custodian's death, an individual must petition the court for appointment as custodian. 
Because the law requires P.O.D. funds to a minor to be paid under WUTMA, WBA recommends that banks encourage their customers who make such designations to indicate a custodian and potentially even a successor custodian upon designation.  

If you have any questions on this topic or other matters of compliance, contact WBA’s legal call program at 608-441-1200 or wbalegal@wisbank.com

Birrenkott is WBA assistant director – legal.

Note: The above information is not intended to provide legal advice; rather, it is intended to provide general information about banking issues. Consult your institution’s attorney for special legal advice or assistance. 

By, Cassie Krause