Set Up a Kid's Account

So you've decided you'd like to establish an account in your child's name for gifts, savings or simply for future expenses.

Although minors cannot legally own any large sums of money, parents have two ways to set aside assets for their children. One is through trusts, also known as guardian accounts; the other is through custodial accounts, known as the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA).

Trust Funds or Guardian Accounts

While not exclusively a hallmark of the wealthy, trusts are usually for families that have ample funds to spare for their children. You'll probably have to get the assistance of a professional, which means added fees and costs.

You can do the following with trust funds:

  • You, the parent, own the account and make contributions. You designate at what age your child receives the money, how much she receives, how the funds are disbursed, and how they can be spent (for example, on tuition, wedding, down payment on a house, etc.).
  • You appoint who manages the account for the your child, usually an attorney specializing in estates and trusts.
  • You can also add to and withdraw from the account, but as the owner, you are liable for the tax burden.

For some parents, being able to designate the purpose of the trust account -- thereby preventing your child from blowing the stash on a new sports car when she's older -- is attractive. You also don't need to hand over the money as soon as the child turns the legal age of adulthood at 18 or 21 as you do with UGMA/UTMAs, the two types of custodial accounts, which we'll look at next.

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