You may not know what it is, but you might pretty soon if you have children. After my third son was born, my wife and I went to our local bank to open a custodial account for young Zachary. As we were getting our details together, the kind lady asked us which one of us was going to be the custodian. I told her we would like to both be custodians, like the other two kids accounts, because we both handle their money matters. She told us that that is a new state law that prohibits both parents from being custodians because there are many parents that use their kid’s accounts as tax shelters for their own money. I was quite offended that one of us could not have access to our son’s money. So, we decided that my wife will be the custodian, and in the event she dies, THEN I can withdrawal from the account. After I got back home, I called the main branch, and the woman I spoke with told me pretty much the same thing. I then called the office of my State Rep, Shawn Webster. The assistant I spoke with was very helpful. She spoke with the chairman of the finance committee, as well as others and found no state law as such. I finally spoke with a Vice President at the bank, and she explained that it was not a state law, but a federal program that is not mandatory but serves as a guideline for banks to go by. I told her that we use the money for school clothes, etc and she agreed that this is not a very good deal for us. This program is called UTMA and puts the parents in the back seat to the children. In a nutshell, to withdrawal money from the account, it must be specifically intended for the child(education, etc). Here’s the kicker- Say you withdrawal money from the account when the child is a minor for whatever reason, once you beloved child turns 18, he/she can sue you for the money back. I will be opening a traditional custodial account at another establishment because I feel this is way out there.


At 12:22 PM, Blogger Ron Schneider said...

Why go through all that trouble? Wouldn't you be better off putting the money for clothes and things in your own account, then create the kids own savings account for their own money. Furthermore, I would setup a 529 college savings fund with a a low initial investment of $250 minimum initial contribution and a $50 minimum subsequent contributions.
Tax-free withdrawals for qualified higher education expenses
The opportunity to contribute up to $55,000 ($110,000 per married couple) without incurring estate and gift taxes.
The parent (or whoever establishes the account) retains control for the life of the account.

At 8:50 AM, Blogger Jude said...

Ron, are doing tax work on the side?

At 1:08 PM, Blogger sansh2o said...

I know that I'm a bit late adding to the Blog but I will anyway. UGMA/UTMA's where created in order for minors to be owners. Under previous law minors couldn't not legally own assets. Questions to consider when opening an account for your kids are; what is the money going to be used for? And try to be as specific as possible. Also consider how long you are willing to save the money; 5 years, 10, 20, etc. And finally one of the more important questions is what is your risk tollerance? That little question will give you an idea of what types of investments to put into which ever account you decide on.
In a nut shell you have roughly 4 options when it comes to types of accounts for your kids. You have a 529 plans, Coverdell accounts, UGMA/UTMA, or you can use your personal IRAs. In a roth you can pull the contribution portion out any time tax and penalty free (earnings have to stay for min. 5 years). Talk to your financial advisor and accountant about the pros and cons of each given your situation.


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