Many parents and grandparents love to set aside some money for their kids in their lives, opening up bank accounts and other assets. It can be a wonderful and kind thing to do, to set aside money for their future, but it’s important to do it the right way. Too many well-meaning adults don’t realize that, after socking away money in a child’s bank account for many years, they automatically lose control of that money once the child turns 18 years old. Most bank accounts started for a minor are “custodial” accounts, meaning that the child is the full beneficiary of that account, and you are simply a temporary custodian. These are also sometimes called UTMA accounts, or “Uniform Transfers To Minors Act” accounts.
Using the gift tax exclusion of $14,000 annually, some adults like to gift money out of their estate for tax reasons, and this is perfectly fine. However, don’t assume that putting it into a child’s account is the best way to go. Again, once that transfer is complete, you no longer have any legal control over those funds, and this may prove disastrous. Most children, whether they are 18 or 21, simply aren’t equipped to handle a windfall of cash on their own. And you, as the adult, have no way to stop them from taking complete control of that account when they are of age.
Another potential downside of opening a custodial account for your child or grandchild, is that you are responsible for handling that money just as well as, or better than, you handle your own. Thus, if you were to mismanage it, or lose that money, your child or grandchild can actually sue you for “breach of fiduciary duty.” This applies to investments too; if you invest that money into a stock or business that fails, you are held liable for those losses.
So, what’s the best way to gift money to a beloved child or grandchild? Set up an irrevocable trust for them, preferably a lifetime asset protection trust. You can put yourself as the trustee, which allows you to set the terms and schedule for the distribution of those funds. You may also appoint a successor trustee, in the case of your death or incapacitation. A qualified estate planning attorney in Greensboro will be able to help you create the right trust for your situation, so get in touch with us at the law office of E.J. Boswell today. Ask for your free consultation to get started.