Between managing daily schedules, school activities, and trying to keep everyone fed and happy, financial planning for our children can sometimes get pushed to the back burner. But the sooner you start, the more time your money has to grow—and the more options your kids will have down the road.
We sat down with Bridget Wyatt and Lindsay Sabel from Merrill Lynch Wealth Management to discuss the differences between common savings options like custodial accounts (UGMA/UTMA), 529s, and trusts—and help you feel confident about the decisions you’re making for your family’s future.
Custodial Accounts and 529s
Lindsay emphasizes that these are all great options, and the solution is very specific to the family circumstance. “Most of our clients have both custodial accounts and 529 plans,” she says. “The custodial accounts are a great place to put money that is gifted and earned by the minor, but more than that can be placed either in investment vehicles or even just a higher yielding money market fund so that their money can grow more effectively on their behalf.”
Bottom line? These accounts are more beneficial than keeping your child’s money in a traditional bank savings or checking account that earns low interest.
Bridget Wyatt and Lindsay Sabel of Merrill Lynch Wealth Management
Lindsay went on to explain, “A contribution to a 529 state tuition program qualifies for the annual exclusion as well as other tax benefits. The earnings in a 529 account are not subject to income tax when earned, and they are not subject to income tax when withdrawn if used for qualified education expenses, whether that is for private school, undergraduate or graduate school.”
Keep in mind that with 529 college savings accounts, you control more than with other types of gifts, but they come with some rules:
- You can’t choose specific investments
- You can only put cash into the account (not stocks or other assets).
However, there’s a nice benefit: if you end up with leftover money in the 529 that isn’t used for education, you can move up to $35,000 of it into a Roth IRA, giving you more options for what to do with that money later.
Irrevocable Trusts and Revocable Trusts
As for creating a trust, there are a two main options: irrevocable trusts and revocable trusts. An irrevocable trust removes the assets from the grantor’s estate, is now controlled by a trustee and cannot be changed or altered without legal proceedings. A revocable trust does not remove the assets from the grantor’s taxable estate, is still controlled by a trustee but the grantor can withdraw or change the assets or terms at any time.
“Creating either of these would imply that your family is now at a stage where you have excess funds that are not needed to put towards your future goals,” says Bridget. “It’s important to employ an estate attorney to structure these properly. We can work with the client along with our trust services to decide which option makes the most sense to pursue.”
This post is part of a 3-part series from our parent company, The Local Moms Network, in partnership with Bridget Wyatt and Lindsay Sabel of Merrill Lynch Wealth Management.