Q&A Custodial Accounts
Question: I’d like to set up custodial accounts for my seven young grandchildren. I would start with $2,000. The money would grow and be theirs to use at age 21 for any purpose. I think they’ll use it responsibly.
Ric: You do? Really?
Do you remember when you were 21?
I am not as optimistic as you. I fear that the typical 21-year-old is more likely to spend the money immediately, on clothes, travel, electronics — or just a night in a bar with lots of friends — instead of investing the lump sum professionally, maturely and responsibly.
If you’re okay with the risk that comes with letting them use the money for any purpose when they become 21, then fine. Simply establish a custodial account under the Uniformed Transfer to Minors Act. Any financial advisor or institution can do it for you. At age 21, the child gets the cash and can do whatever he or she wants with the money. If you’re lucky, you’ll get invited to the party.
Instead, you might want to consider these ideas:
1. Establish a 529 college savings plan. You retain control over the account, and if you discover that one of the kids doesn’t need the money for college, you can transfer the account to another grandchild (Earnings not used for college are subject to taxes and a 10% IRS penalty.)
2. Keep the money in your name. When each child reaches age 21, give him or her a check — if you are still inclined to do so. But by then, your attitude toward (or relationship with) that child might be very different from today’s. Keeping the money in your name keeps you in control. And if you need the money along the way, it’s still yours to use for your own benefit. (Worried you might die before the kids reach age 21? Just add a paragraph to your will so they’ll get an inheritance.)
3. Establish a Retirement Income for Everyone Trust®. I invented this tool 12 years ago. It lets you set money aside for kids and grandkids of any age — for their retirement! You can get complete information at visit www.ricetrust.com.