Children’s Savings Plans


Your child is born, and there are checks in his name with beautiful cards that come your way.  Now is the time to think about what to do with the money you child will get at his birth, for his birthdays and holidays, bar/bat mitzvah, sweet 16, and gifts from Grandma and Grandpa.

There are many years that will pass until your child is capable of handling her own financial affairs.  Even longer if your child is special needs, is a spendthrift and loves spending money frivolously or is not a path that you approve.  There are simple accounts one can open, but they tend to be the least flexible.  Let’s review.

Bank Custodian accounts seem to be the most favored and popular way to open an account for a child.  You go to your bank and ask them to open a custodian account for your child under the Uniform Transfer to Minor Act or Uniform Gift to Minor Act.  Put money in from time to time, and at age 18 or 21, the account automatically becomes the child’s account.  There are a few negatives to this account.  What if there is a sizable sum in the account at the time that your child reaches majority, and he is not fiscally responsible, or wants to spend it on a large purchase with which you disagree, he can take the money and do as he wishes without your permission.  The interest rates at banks are dismal, keeping money long term at miniscule rates does a disservice to your child.  One can open an account with a brokerage house and invest in stocks, bonds, mutual funds etc., but not all parents feel comfortable making long term investment decisions for their children.  Also note, that custodian accounts legally are part of the custodian’s estate.  Any income attributed to the custodian account is taxable not to the child but to the custodian, and is part of his taxable estate.  So this is not a method by which a parent transfers assets out of her estate for the benefit of her child.  Only once a child matures, and takes the money, is the money out of the custodian’s estate.

Many people consider a 529 college plan.  The investments in said accounts grow tax free, and as of today, is not taxed when used for education.  The question is whether the person for whom you set apart the money will go to college.  Some 529 college plans are state specific.  If your child does not go to college, you do have the option for using it for college for another child, but there is a 10% penalty to do so.  For parents or grandparents who want to transfer assets out of their estates in large quantities in one year, without tax implications, they can contribute 5 years’ worth of annual exclusion payments to the 529 plan without having to use their lifetime gift/estate tax credit.

I believe the most flexibility comes with a Lifetime Trust for the benefit of minors.  Although, growth in said trust is not tax free, the trust gives you the most flexibility.  The trust appoints trustees, many times, children, to oversee the investing of funds and distribution of funds.  The trustees have absolute discretion in providing the income and principal to the children at any age and for any reason.  Most importantly, if the childs is a special needs child, money can be used for the benefit of the special needs child throughout his life without interfering with government benefits.  If there is a child who is not a good path, the trustee can withhold funds from the child until the child matures, providing necessary funds for health, education, maintenance and support and the absolute discretion of the trustees.  Money in this trust is not subject to divorce, bankruptcy, liens or creditors, and can stay in trust for generations.  The trust should be created by an attorney who specializes in trusts, but once the trust is created, there are no annual fees that have to be paid.  The trust can be set up so that the parents and grandparents benefit from gifting money to children and grandchildren gift and estate tax free.  Real estate, investments and other assets that will appreciate in coming decades are the perfect asset to place in trust for growth for generations to come.

Lenore has been practicing Trust and estate/elder for 25 years.  She has her LLM masters in Taxation, and has offices in New York and New Jersey.  You can contact her via telephone at (516)569-4671 or by email at


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