Now that Thanksgiving is over, the 2012 holiday season is officially in full swing. For those with young children, that means making a list, checking it twice, and trying to prioritize between things they may need – and things they want to play with until they break. Now, I’m not even going to attempt to suggest gift ideas for your young family; you know your situation better than anyone, and you know what your kids like and don’t like, need and don’t need. But inevitably, someone in your family will hand you a check with the intention that the money be put towards your child’s education or saved for your child’s benefit. With that in mind, consider opening a custodial account when accepting money on your child’s behalf.
Minors can legally break a contract
With some exceptions, minors are legally permitted to void contracts. In other words, a minor has the ability to break a contract and walk away from any contractual obligations. Given this fact, anyone entering into a contract with a minor does so at their own risk. So, for instance, if a bank agreed to open a savings account for a minor, the bank would risk the very real possibility that the child would run up fees, only to end up walking away.
Most states have a Uniform Transfers To Minors Act
However, in most states, an adult can open a custodial account on behalf of a minor. These custodial accounts are governed in nearly all states, including Massachusetts, by some form of a Uniform Transfers To Minors Act (UTMA). When you open a UTMA account for your child, you can name yourself as the custodian. You can also name another adult to fill that role, if you wish.
A UTMA custodian has the authority to:
- Control and manage the assets in the account on behalf of the minor, who is the account beneficiary;
- Collect, hold, manage, and invest the money for the minor’s benefit;
- Withdraw money from the account to pay for certain expenses for the child.
However, the custodian must keep an inventory of records for any transactions concerning the account. When your child reaches a specific age (14-years-old in Massachusetts) she will have the right to ask for information about the account. And by law, upon reaching the age of 18 (or 21, depending on the state), the child has full ownership rights to the account and can withdraw and spend the money as he or she pleases.
Some other important things to note:
- The assets in a UTMA account are owned by the minor, not the custodian;
- As the child’s legal property, the account balance could reduce the amount of financial aid they might receive;
- Cash gifts transferred into a UTMA account are considered legally complete and cannot be withdrawn other than for the benefit of the minor.
Alternatives to a custodial account
Of course, what you ultimately decide to do with money given to you for your children will depend on your long term goals. For a host of reasons, a UTMA account might not be your best choice if your main concern is saving for college. In that case, consider investing in a 529 plan.
Here are some other options:
- Put the money into a dedicated savings account that you own, and then include a provision in your will leaving that specific account to your child;
- A living trust might be the way to go if your goal is to maintain more control over your child’s access to the money;
- And don’t forget the good old U.S. savings bond.
You really do have many options. At the very least, a custodial account buys you time, since you can just let the money sit in that account until you decide to put it somewhere else. All things considered, though, the flexibility of setting up and managing a UTMA account makes it an attractive option for parents.
I provide this information not as an attorney, but as a parent who can relate to the sometimes overwhelming choices we have to make in the interests of our children.