Q. I am the representative payee for two grandchildren and would love to invest the money we don’t use. When they turn 18, I understand any unused funds must be turned over to them. My husband and I are concerned that at 18, they may have poor judgment and waste the money we have saved in their names. Are there any investments we could make for them that might not release the funds when they turn 18?
— Grandparent
A. We’re glad to hear you’re trying to save funds for your grandchildren.
Any custodial account that is set up, such as a Uniform Transfers to Minors Act account (UTMA) or Uniform Gifts to Minors Act account (UGMA), allows a minor to have money invested with the oversight of a guardian or trustee such as yourself, said Jody D’Agostini, a certified financial planner with Equitable Advisors/The Falcon Financial Group in Morristown.
You can manage the account until they come of age, which in New Jersey is the age of 18, she said.
“Earnings in this account are taxed at the generally lower tax rate of the child,” D’Agostini said. “Up to $1,050 of gains in the account are not taxed. Earnings up to $2,100 are taxed at the child’s rate with anything earned over that amount at your higher tax rate.”
Investing these funds could be a great opportunity to educate the children about the value of investing, D’Agostini said.
“As they get older, you can educate them on the different types of assets and their performance over time,” she said. “They can learn about saving towards their goals.”
A good alternative, once they receive employment income, is to open and fund a Roth IRA, she said.
“You would be limited to the amount earned, but these accounts are powerful as they grow income tax free and the distributions are also tax-free,” she said. “Contributions could be accessed without penalty, but earnings that are accessed incur a 10% penalty as well as taxation if they are withdrawn prior to age 59 ½ or after the account has been open for at least five tax years.”
Another option would be to set up trust accounts in the children’s names with you as the trustee, and perhaps an alternative trustee since the trust will likely survive you, she said, noting that you can decide the terms of the trust.
D’Agostini said trusts can protect a child and provide a source of income over time.
“You could create an incentive trust that requires some description of what actions need to be done for distributions such as obtaining some education, being gainfully employed or not using drugs,” she said. “The trust will insulate them from creditors and perhaps an eventual divorce as these are off limits for those purposes.”
You’ll need to consult with an estate planning attorney if you go this route.