The Dos and Do Nots of Custodial Accounts
February 2024
Most of us started our investment journey as young adults with our first 401(k) or IRA. I find many investors are largely unsure of how to invest but press on anyway because they know it is important to save and invest for the future.
If this was your experience, ask yourself: What if instead of being confused and uncertain you had been confident? Would that have changed anything about your present and future?
While we can’t go back and change our past, we can make a better future for our children. That better future starts with education.
Most of our money education still happens at home and we still often learn by doing. If you want to include education about investing, there is a tool available to you in the form of a UTMA.
What is a UTMA?
The acronym UTMA stands for Uniform Transfer to Minors. According to the Cornell Law School Legal Information Institute, passage of the Uniform Transfer to Minors Act allowed property such as cash, securities, real estate, or art to be transferred to a minor without establishing a formal trust.[1] The donor or custodian – usually a parent – manages the property for the minor until they reach a certain age; usually age 18 or 21.[2]
When establishing an UTMA for the benefit of a minor, someone is named the custodian (sometimes called the trustee). Typically, this is one or both of the parents, but can also be the person who funds the account, such as a grandparent, or even an institution. When the beneficiary reaches the age of majority, they become the sole owner of the account.
A UTMA investing account can be a wonderful teaching tool if used correctly.
Why would I want a UTMA?
We teach by example but often learn through experience.
You can set an example of saving and investing for your children throughout your life and still leave them ill equipped to replicate your example when they become adults.
A UTMA can act like an investing account with training wheels which allows your child to learn important skills while the stakes are low, and they have adult supervision.
“Can’t I just do that with an account in my name that I gift to them later?” Yes, you can.
But think how much more of their attention you’ll capture by having an account that belongs to them and that they exercise responsibility for.
As with any tool, there are some dos and do nots to be aware of.
Dos of UTMAs
A lot can go wrong when you give a newly minted adult a sum of money to do with as they please. But a lot can go right too if you follow a few best-practices.
Do involve your child
If you intend to use your UTMA as a teaching tool, you need to involve your child in the process. How? It starts with a conversation.
Tell them you are establishing an investing account and that you’ll be putting a certain amount of money in it to start. Then make it clear that you expect your child to help make decisions about how the money in the account is invested.
It’s also wise to encourage your child to put some of their own money into the account over time. Some parents choose to encourage additional saving by matching the money their kids put into their accounts.
Do build knowledge over time
When using a UTMA as a teaching tool, it’s wise to have a program of lessons you want your child to learn about investing. Naturally you want to make those lessons age appropriate. Teaching a lesson on compounding is a great place to start.[3]
Other topics you might cover include:
- Definition of a stock
- Introduction to the stock market
- Introduction to taxes
- Introduction to goal setting
- Reviewing progress over time
Do capture their imagination
Getting kids interested in investing is a challenge. You can use the investment selection process to help catch their attention. Ask yourself, “What is my kid really into?”
Maybe they are big animal lovers. You can find stocks that provide goods and services for pets and their people.
Are they super into cars and truck? Maybe an automotive manufacturer or parts supplier is a good choice.
Do they spend hours in front of their favorite video game console? Maybe they have a favorite place to shop. Or perhaps they really like a certain restaurant or type of food.
The possibilities are endless. And if you can connect their investing activities with something they really care about, you’re much more likely to have an engaged investor vs. a kiddo who’d rather be doing anything else than talking about money with you.
Do check in annually
A portfolio works best when you leave it alone to grow. That means not checking in on your kid’s investments every week, every month or even every quarter. Set aside one day each year when you can review results with your child. This is also the ideal time to deliver whatever lesson you want to have on money and investing that year and to add any new money to the account.
Do encourage goal setting
Investing is abstract and can be difficult for younger children to grasp. Setting a goal for what they might do with the money in their account can help make investing feel more purposeful and interesting.
Resist the urge to yuck your kid’s yum when goal setting. If they want to set that money aside to buy a tricked out pickup truck or (as one young client has told me) a tank, let them have that as a goal. Their attitudes and desires will change over time and their goals will shift to.
For now, you just want to cultivate their interest in investing.
Do praise diligence and patience
Your child is unlikely to be super interested in investing and saving right away. They might spend all their allowance and birthday money rather than putting part if it away. They may be disengaged with the money lessons are trying to teach.
Be patient. Building saving and investing skills takes time. And you never know what event will spark their imagination. If you give them the resources, they are much more likely to develop an interest over time.
Do allow your kids to make mistakes
Your kid is going to make mistakes. In life and with money.
Let them.
Let them screw up now while you are there to help them sort through the consequences. Once they leave to begin their adult lives, it will be much harder to help them.
If they pick an investment that you discourage but they proceed anyway, be prepared to help them sort through the consequences when they arise.
Do Nots of UTMAs
There are a few key mistakes that can make a UTMA a less than ideal project.
Do not overfund
There are a variety of reasons not to stuff too much money into a UTMA. The primary one is that there’s only so much money you want your young adult to have control of all at once.
A good jumping off point is to put between $1,000 and $2,000 into the account to start. You and your child can add money to the account over time.
If you take care to engage your child with the investing process, the chances of the money you’ve set aside being wasted declines.
Do not hide the account
Failing to disclose the account and involve your child in its administration is a big mistake.
Imagine you come of age and find that there’s an account with a bunch of money in it that belongs to you. You’ve never been asked to maintain or cultivate the asset and view it as “found money”.
How likely is it that you would liquidate the account and so something wasteful with it. I’d say the likelihood is high.
Do not micromanage
Your child won’t learn anything if you micromanage them. Yes, guide them and offer them education. But in the end, they need to have decision making authority. Otherwise, you run the risk of defeating the whole purpose of having such an account.
We can’t all be experts in everything. You may find the prospect of taking on your child’s investment education intimidating.
The good news is you don’t have to do it alone. Financial Advisors like me, who are passionate about educating their clients, can help you with this project too.
One of my favorite times of year is when I review UTMAs with their beneficiaries. Seeing young people get excited about saving for their future really lights me up.
Curious about a UTMA?
Email me to start the conversation!
[1]https://www.law.cornell.edu/wex/uniform_transfers_to_minors_act#:~:text=The%20Uniform%20Transfers%20to%20Minors,without%20establishing%20a%20formal%20trust.
[2] This age varies based on your state of residence.
[3] You can find a simple lesson on compounding here.
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