Custodial Account for kids

[whitecoatwife]

Long time reader and listener. Not a physician, but married to one and handle all finances. I was recently thinking of opening up small custodial accounts for our kids. In florida they would gain custody of the account at 18, but betting on my parenting and children I am ok with that idea and that they won't just run out and spend it without telling us.
Reasoning being, we already have florida prepaid plus 529's in place. We are in the highest tax bracket. We can contribute small amount and it will grow tax free for the first couple thousand a year and then at their rate before eventually hitting ours.

I'm talking $5,000 to start and a grand a year. Should ad up to about $50,000 before they are 30. My intention is to teach them the value of interest and from an early age and have money sitting there for wedding, additional schooling, etc.

I realize a roth for them would be a great idea once they reach working age and can show income, but they are 5, 7 and 8 we aren't there yet. Is there something I am missing how this is a bad idea to have some tax free growth with money sitting there for things we are coming down the pike like weddings that we know we want to contribute to? I just haven't heard many people talk about doing this. Maybe its just the fact that you technically lose control of account a certain age?

tell me why im wrong

[VagabondMD]

I did the same/similar. In my state, the age to take over is 21. My son is 22, has ignored his account and probably has no idea how to get to the money if he wanted to. When I officially turned it over, I instructed him that the money was for expenses like advanced education, house down payment, next car, travel, and other 20’s expenses. He has about $180k in the account. If he wanted to buy a new Porsche tomorrow, he could walk into Fidelity and get a check.

My daughter is 19 and has a similar balance. She is the more likely of the two to use some of the balance for graduate or professional school.

Both kids have Roth’s, too. I matched their contributions from various jobs over the years.

College is paid for by Mom and Dad. We used 529 plans for college savings.

[jfoxcpacfp]

Welcome to the forum! You certainly don’t need a white coat to participate, just a curious and learning nature, a helpful attitude, and an open mind. (I would add good grammar, punctuation, and sentence structure to that list, but I accept I have “issues” in that area and am in the distinct minority🤦🏼♀️).

Not going to try to tell you “why you are wrong” because you may not be. I would first ask the purpose of the account. The benefit is insignificant but I agree it should be considered. So, what is your ultimate goal in putting $$ in the UTMAs? If you only want to teach them about interest, you can do it with a savings account with a lot less $$. I would possibly be on board with allowing them to buy stocks in a portfolio of their choosing and educating them about investing, the risks and rewards, understanding what stocks represent and why a mutual fund is less risky than individual stocks (but only after letting them choose their own portfolio), etc.

[Notsobad]

We did this as well. It started with a cash gift grandparents, but they were a little older than yours. I tried to teach them about stocks and compounded gains. If they save or earn money, we match it I offered that 20% was them to pick stocks and the rest in index funds. The older one had zero interest but was happy to save and let us match. She is in college now and seems to view it as long term savings. The younger was interested and bought AAPL and keeps track of his balance a few times a year.

eventually we will gift more aggressively as they get older (and it is all theirs)

[racelari]

hey man no not a bad idea I have been considering opening an account for my 6 and 4 year old myself. and yes the first $2k of growth is tax advantaged only risk is as Jim says that at the age of 18 depending on the state they can blow it all on cocaine and hookers You have already acknowledged that risk so have at it hoss!

I think though if I were teaching my kids about investing with this account that I would avoid individual stocks, because not only might it lose money, but worse, my kids might make a crapload of money and learn the worst lesson, that it's better to invest in individual stocks!

[pierre]

It’s fine to open an account for your kids. But they aren’t going to learn about finances by watching the account grow. They will learn by watching your spending habits and how you deal with money on a daily basis.

[Lordosis]

I did the same/similar. In my state, the age to take over is 21. My son is 22, has ignored his account and probably has no idea how to get to the money if he wanted to. When I officially turned it over, I instructed him that the money was for expenses like advanced education, house down payment, next car, travel, and other 20’s expenses. He has about $180k in the account. If he wanted to buy a new Porsche tomorrow, he could walk into Fidelity and get a check.

My daughter is 19 and has a similar balance. She is the more likely of the two to use some of the balance for graduate or professional school.

Both kids have Roth’s, too. I matched their contributions from various jobs over the years.

College is paid for by Mom and Dad. We used 529 plans for college savings.

Care to adopt me? :P



Seriously OP sounds like a great idea. I will probably be doing something similar at some point as well but we are focusing on the 529s still.

[somethingmorethanfree]

Thanks for the post. Spouse here as well. Our kids are 6-10 yr be old range. I think this is something worth looking at as well. There is some risk for sure with their own wisdom at that age. One benefit I see from looking into it a bit is lawsuit protection - the idea that in a malpractice suit this is protected. Seems like a legit risk that is worth mitigating a bit if possible.

[spiritrider]

A small clarification.

FL allows allows setting up a UTMA account with a termination age up to age 25. Between 30 days before and after age 21, the custodian must give the owner of the account a 30-day notice. This notice informs the account owner that they have a one time option to assume ownership before age 25.

The custodian can use one or more carrots to encourage the account owner to leave the UTMA account under custodial control.

[ENT Doc]

Timely post. We are looking into this now as well. Going to be setting up a custodial savings account and eventually link it to a brokerage account and start investing once the account balance builds some.

[Tim]

Just a note. You can give your kids as much money as you want. The question is, what are you teaching them? There are many financial lessons and habits they need to master. Running another account teaches very little. Use it as a tool.

[VagabondMD]

A small clarification.

FL allows allows setting up a UTMA account with a termination age up to age 25. Between 30 days before and after age 21, the custodian must give the owner of the account a 30-day notice. This notice informs the account owner that they have a one time option to assume ownership before age 25.

The custodian can use one or more carrots to encourage the account owner to leave the UTMA account under custodial control.

My estate lawyer set up a complicated scheme to move the assets from each UTMA into some kind of ?family trust with an LLC owned by me to control the trust infinitely ...but it was so complicated that after at least 6 hours speaking with Fidelity (including 4 hours with me in person in the Fidelity office) and a dozen calls to the lawyer (and knowing that each of the 2 x 2 = 4 new accounts would have to file taxes), we realized that it was so complicated that no one could figure out how to set it up, and we decided to pass.

[bean1970]

We had a 529 but they were new at the time so we opted to also use UTMA in tandem, but with less contribution (like 80/20 529/UTMA). My kid passed the age of majority long time ago and i'm still the custodian. it's just parked money. He knows about it and just watches it grow. He also has his own brokerage account which he tinkers with. There was small tax benefit at a sweet spot when the account was spitting off income but was in the kiddie tax exemption. Now my kid puts it on his taxes and there is no tax because he's in the lowest bracket. it's also asset protected money while in the UTMA.

[Sampter]

Are the tax savings really that great if you are putting in < 15K a year or similar? Seems more trouble than its worth and could just gift money to adult children at that point if desired.

[endo4jc]

Long time reader and listener. Not a physician, but married to one and handle all finances. I was recently thinking of opening up small custodial accounts for our kids. In florida they would gain custody of the account at 18, but betting on my parenting and children I am ok with that idea and that they won't just run out and spend it without telling us.
Reasoning being, we already have florida prepaid plus 529's in place. We are in the highest tax bracket. We can contribute small amount and it will grow tax free for the first couple thousand a year and then at their rate before eventually hitting ours.

I'm talking $5,000 to start and a grand a year. Should ad up to about $50,000 before they are 30. My intention is to teach them the value of interest and from an early age and have money sitting there for wedding, additional schooling, etc.

I realize a roth for them would be a great idea once they reach working age and can show income, but they are 5, 7 and 8 we aren't there yet. Is there something I am missing how this is a bad idea to have some tax free growth with money sitting there for things we are coming down the pike like weddings that we know we want to contribute to? I just haven't heard many people talk about doing this. Maybe its just the fact that you technically lose control of account a certain age?

tell me why im wrong

You are not wrong. I was going to post what spiritrider did. I am Florida resident also. I have UTMAs for my two year old and my 7 week old. I contribute their cash gifts from family into a total market index fund for each child. I also have 529s for each and only contribute $500 per month for each child since there is no state tax benefit. I agree with other posters that how you and your spouse manage your money will have a more significant effect on how your kids learn personal finance.