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What Account Do I Put Money in for My Children?

In this week's Arista Advice, Paul L. Moffat of Arista Wealth Management provides three different examples of accounts in which you can put money away for your children, as well as their individual pros and cons.

Full Transcript:

Welcome to Arista Advice! Hope you’re well and having a great week.

Question of the week is - Paul, what account do I put money in for my children? That's a terrific question, and it depends.
I recently met with a friend whose wife unexpectedly passed away after a three year battle with cancer. He came in. We had a wonderful conversation, and his wonderful wife left some money for their children, and he said "Paul, where should I put the money?"

Let me share with you four different options that you should consider in putting money aside for your children and your minor children in regards to their future.

The first bucket is putting money aside in a UGMA. You can see here the pros. The account is taxed at the retirement threshold. It reduces the parent's overall tax rate. The gifts are tax-free to donors, but the negatives and the cons are that it's not tax deferred. The donor cannot receive the funds back and once the child reaches the specific age according to the state, only the child can make the withdrawals, so when you put the money in, the money is not coming back.

The second bucket is a 529 college savings account. The pros are: it's tax-free for education expenses, parents stay in control of the money, there are flexible beneficiary options, there is asset protection. The three negatives about the 529 is that the funds are only eligible for education and education related expenses. In December of 2017, the government allowed and loosened some of the ways to spend that money for prep schools and for some other vocational technical schools and also for some specialty schools. Secondly, it could affect the financial aid eligibility if they have a large 529 balance, and three there's a 10% penalty if money is moved into a new investment account.

The third bucket is trust account. The pros of a trust account is it allows your account value to avoid probate. It also avoids ancillary probate in another state. The assets are directed in the event you become incapacitated, and also the trustee can maintain the control indefinitely of those assets. The cons or the negative, two items, is there's no tax benefits to the parents. It lacks asset protection.

 Please review this chart. Give some time and consideration, discuss it with your spouses and others to become better informed on how parents should be giving money to their minor children. Hope this is helpful. Have a great week. We look forward to talking to you soon!