Twice in the span of a week I was asked my thoughts on titling of children’s assets. It wasn’t asking how they should invest their children’s investments, or more specifically, their clients’ children’s assets, but rather how should the accounts be actually titled. I am of the opinion that money can do good things and money can do bad things, so the actual titling of the assets is a very important issue to consider.
It should be noted that even the term “children’s investments or savings” may have different meanings to different people. In my particular case I am referring to money that I am gifting my son (i.e. I am not looking for it back), and gifts made to him by others wherein they felt it was alright for me to keep tabs on it for the next two decades (at least two decades – as discussed below).
What is a Uniform Transfer to Minor’s Account?
An UTMA account is one which a custodian operates a child’s savings or investments, or as investopedia puts it,
An act that allows a minor to receive gifts such as money, patents, royalties, real estate and fine art, without the aid of a guardian or trustee. Under UTMA, the gift giver or an appointed custodian manages the minor’s account until the latter is of age (usually 18 or 21). The Uniform Transfer to Minors Act also shields the minor from tax consequences on the gifts (up to a specified value).
It is a very simple and natural way to set up the account. The common thought process is, “It is their money I’ll act as some type of fiduciary-custodian for it and when he or she hits 21 it is theirs.” However, I don’t believe that is in the best interest of the child.
Why I Don’t Like UTMA Accounts
There is one minor reason and one very major reason why I dislike that type of set up (as well as the UTMA’s cousin the 2503(c) trust account). The minor reason has to do with college planning. Under current law assets in an UTMA are counted as a student’s assets for purposes of financial aid (as opposed to a parent’s assets). When calculating eligibility for financial aid it is much more detrimental to have assets in a child’s name. This is a huge deal for most. So why is it a minor one reason? Only because the next reason I dislike UTMAs is so much more important.
In most states the UTMA becomes the property of the child at age 21 (there are a few States which have held onto the 18 age). Do you think “21 year old you” should have received any amount of money? How long do you think you would have held on to it before it was gone? Maybe it is because I am surrounded by children under the age of 5, but this seems like a much more pressing issue than financial aid planning.
How I have Titled My Son’s Assets?
My son’s savings account is titled jointly between The Wife and I (and appropriately and clearly labeled as such in our easy to use Capital 360 Account) while his investment account is titled in my name alone. The investment accounts I set up for my nieces are set up in my name with one of their parents as beneficiary should I prematurely predecease (the parents also get a copy of the statements). This type of arrangement only works if you really see yourself as a fiduciary in the strictest sense of the word.
My goal one day is to use the accounts as either teaching tools or to hand over clear and free one day, but that day will be when The Wife and I decide he is ready (or in the case of my nieces – when their parents decide).
The obvious negative regarding this type of set up is that I’ll be paying tax on those investments until control is fully relinquished. Unfortunately, the accounts aren’t large enough to worry about the unrealized gains just yet (and the way the kiddie tax laws are set up right now it isn’t going to matter all that much in the future).
How have you titled your Children’s Savings and Investments?