What's Your Opinion on a Custodial Brokerage Account?

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chambers136
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What's Your Opinion on a Custodial Brokerage Account?

Post by chambers136 » Fri Dec 07, 2018 8:24 am

We have a 6 year old son that currently has a joint account at a local bank with about $4000 in it from birthdays, Christmas, etc. I was considering opening a Custodial Brokerage Account at Schwab to invest some of this money. Looking back at some very old posts, there seem to be mixed feelings- some say do it, others say keep it in our account and invest, etc. What's your current feeling of the pros and cons of this type of account?

retiringwhen
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Location: New Jersey, USA

Re: What's Your Opinion on a Custodial Brokerage Account?

Post by retiringwhen » Fri Dec 07, 2018 9:39 am

chambers136 wrote:
Fri Dec 07, 2018 8:24 am
We have a 6 year old son that currently has a joint account at a local bank with about $4000 in it from birthdays, Christmas, etc. I was considering opening a Custodial Brokerage Account at Schwab to invest some of this money. Looking back at some very old posts, there seem to be mixed feelings- some say do it, others say keep it in our account and invest, etc. What's your current feeling of the pros and cons of this type of account?
My father-in-law and I both open UTMA accounts for my children before 529's existed. I opened 529's in the late 90s as well.

I will say that once money is in a custodial/UTMA account (even at a bank) it is the child's. It has to stay in custodial accounts, you are just the trustee. For future money you have a choice for your own gifts and recommendations of gifts from other family members, etc. Consider a 529 account as a very high priority.

As a parent of now adult children who turned out on the broad spectrum of success, I can tell you that you need to ask a very important questions.

Here is the big question. (Some people consider this a tail risk, but my family experienced the realization of the risk.)

Are you okay with handing the money that will exist in the account to the child at age 18 or 21 and relinquish all control? (age based upon the state you live in.)

Frankly, you don't know how a 6-year old will turn out (my 3 children were all bright, loving and delightful at that age), don't just assume it will go well

I lost a good 6 mos. of sleep over this very question when one of my son's turned out at age 19 to have an active and self-destructive (to the point of near death more than once) drug problem. At age 21, he was going have gain control of enough money to pay for a year of college if something was not done (needless to say, he was not in a position to attend college successfully). Trust me when I tell you, it would have literally killed him to receive that money and it was slowly killing me out of concern.

I did everything in my power legally to use that money for his support while the funds were still under my control to support his life BEFORE he got access to the money. If it had not been for sending him to rehab, it would have ended up in his hands (Rehab, btw, was a complete waste of money in his case, but that is a completely different story). The problem was painful, stressful in all ways that fear of access to these funds made only worse.

On the other hand, I also had put nearly 1 years worth of college funds in a Vanguard Nevada 529 account. I didn't worry a bit about those funds. When it became clear it would not benefit him to use those funds, I re-directed it to my other children who did go to college successfully. If you don't have other children there are many practical options for redirecting the funds including extended family members or withdrawal with penalties similar to early Roth withdrawal (it is still your money for all intents a purposes).

There are significant tax advantages to the 529 independent of the control issues, but depending on your income, savings for college, etc. the 529 may have negative impacts on financial aid, not an expert there. The trust/kiddie taxes have evolved over the past few years with the last tax law changes, but overall my take is once you have significant funds in a child's name, there are negative tax consequences (others can tell you more.) The 529 side-steps all of that very neatly (as I believe Congress intended).


Bottom line, a custodial / UTMA acocunt of any sort is a one way street that moves money into a child's ownership with no way out. Based upon that truth, be very careful.

fabdog
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Re: What's Your Opinion on a Custodial Brokerage Account?

Post by fabdog » Fri Dec 07, 2018 9:53 am

if saving for college a 529 is a much better choice, earnings tax free, and as long as used for education no tax impact. If all funds not used can be moved to a variety of different relatives for their use

UTMA if you want to give them a nest egg. Downsides are paying kiddie tax if account throws off lots of dividends/cap gains, and they money is theirs at 18 or 21, which may or may not turn out to be a good thing.

If wanting to do a nest egg you could set up an account under you/spouse, invest it, and gift to kids later... if it's large you may have to work thru gift tax issues or give over a number of years, but you still control the money in case things don't go well

Mike

senex
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Re: What's Your Opinion on a Custodial Brokerage Account?

Post by senex » Fri Dec 07, 2018 10:44 am

retiringwhen wrote:
Fri Dec 07, 2018 9:39 am
I lost a good 6 mos. of sleep over this very question when one of my son's turned out at age 19 to have an active and self-destructive (to the point of near death more than once) drug problem.
Thank you for sharing those personal details -- they create a much stronger impression than a generic warning. They also are thought-provoking with regard to estate planning. Much thanks.

chambers136
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Re: What's Your Opinion on a Custodial Brokerage Account?

Post by chambers136 » Fri Dec 07, 2018 11:41 am

retiringwhen wrote:
Fri Dec 07, 2018 9:39 am
Frankly, you don't know how a 6-year old will turn out (my 3 children were all bright, loving and delightful at that age), don't just assume it will go well
Thanks for the detailed story. It really does make me reconsider. I should've mentioned that we have 100k for him in a 529- I have since slowed down contributions to this, as this should be about sufficient for a public university when he's of age. If I go the investment route with his savings, maybe I'll transfer it to our brokerage and buy a fund that we don't hold- that way I can maintain it separate from all of our money.

retiringwhen
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Location: New Jersey, USA

Re: What's Your Opinion on a Custodial Brokerage Account?

Post by retiringwhen » Fri Dec 07, 2018 12:01 pm

chambers136 wrote:
Fri Dec 07, 2018 11:41 am
If I go the investment route with his savings, maybe I'll transfer it to our brokerage and buy a fund that we don't hold- that way I can maintain it separate from all of our money.
Creating pots of money in your name ear-marked for the child is a very good way to do if you find that you have filled up the 529 or don't want to go that route.

In other threads folks have discussed creating separate accounts with TOD type beneficiary arrangements to ensure the money would go to the child. Also some folks have used Roth accounts, but that has the downside of using up very valuable space for most people.

Remember all college support payments are exempt from Gift Taxes so you don't have to worry about that. And if you end up with money to gift for a home/car, etc. you can gift $15,000/year ($30K for married couples) exempt from Gift Tax. And for 99% of folks these days, with the current estate tax limits, even using up some from the Gift Tax exemption for gifts over the annual limit is very low risk.

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