I currently have a second savings account where I'm saving money for my child's future - most likely it will be used for their college and/or wedding.

I've heard horror stories of parents stealing their children's savings to feed an addiction. I don't plan to do that, but for argument let's say I can't trust that my wife and I will stay "safe" over the next two decades.

What sort of savings or investment account can I open for my child where:

  • I can easily add funds
  • (ideally) I can view the balance and watch its performance as an investment
  • My wife and I cannot withdraw from it, or withdrawing from it is very difficult
  • My child can withdraw from it easily once they are an adult

I'd ideally like a low-risk investment with a better rate of return that just your typical bank savings account. The main focus, however, is that it should be inaccessible to my wife and me while being accessible to my child.

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    +1 for realizing all aspects of an addiction (if that is what it is) – Insane Feb 6 '16 at 2:14

Uniform Transfer to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA) accounts in the United States are accounts that belong to your child, but you can deposit money into. When the child attains his/her majority, the money becomes theirs to spend however they wish. Prior to attaining their majority, a custodian must sign off on withdrawals.

Now, they are not foolproof; legally, you can withdraw money if it is spent on the child's behalf, so that can be gamed. What you can do to protect against that is to make another person the custodian (or, perhaps make them joint custodians with yourself, requiring both signatures for withdrawals).

UTMA/UGMA accounts do not have to be bank savings accounts; for example, both of my children have accounts at Vanguard which are effectively their college savings accounts. They're invested in various ETFs and similar kinds of investments; you're welcome to choose from a wide variety of options depending on risk tolerance. Typically these accounts have relatively small fees, particularly if you have a reasonable minimum balance (I think USD$10k is a common minimum for avoiding larger fees).

If you are looking for something even more secure than a UGMA or UTMA account, you can set up a trust. These have several major differences over the UGMA/UTMA accounts:

  • Trust documents can explicitly state what purposes money may be withdrawn for.
  • Trusts can turn over control to the beneficiary at a later (or earlier) date than a UGMA/UTMA account, which has a legally defined date the child gains control. For example, a parent cannot require a UGMA account be used to fund college - the child could do whatever he/she wants with the money at 18. A trust could require the funds be spent on college, and only turn over excess proceeds at 25, for example.
  • Trusts will cost significantly more money to set up (as a lawyer will need to be involved, most likely), but the lawyer may also provide an additional level of confidence the money cannot be disbursed improperly.

Some of course consider the second point an advantage, some a disadvantage - we (and Grandma) prefer to let our children make their own choices re: college, while others may not prefer that.

Also worth noting as a difference - and concern to think about - in these two. A UGMA or UTMA account that generates income may have taxable events - interest or dividend income. If that's over a relatively low threshhold, about $1050 this year, those earnings will be taxed (on the child's own tax return). If it's over $2100 (this year), those earnings will be taxed at the parents' tax rate ("kiddie tax").

Trusts are slightly different; trusts themselves are taxed, and have their own tax returns. If you do set one of those up, the lawyer who helps you do so should inform you of the tax implications and either hook you up with an accountant or point you to resources to handle the taxes yourself.

  • Can I set up any account as an UTMA/UGMA? Do I just talk to a clerk at my local bank branch to make the second savings account into one? – Martin Carney Feb 5 '16 at 23:08
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    I'm not sure about the mechanics of conversion; it may be that simple, or you may have to technically open a new account and transfer the money into it, closing out the original. But any bank should have an UGMA and/or UTMA account, certainly; and they're often low or zero fee. What I'm not sure about, though, is if you do this, how easy it would be to then transfer the funds to an investment-capable account (say at Vanguard); in theory it should be possible, but I'm not sure if there are roadblocks to prevent you from transferring it improperly that might get in the way of a legit transfer. – Joe Feb 5 '16 at 23:09
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    Do not trust lawyers on tax issues, they're usually quite bad at assessing tax risks. Lawyers will happily set up a trust for you, but tax-wise it is not as good as UGMA/UTMA (tax rates are higher, deductions are lower). If choosing to go the trust path - get a lawyer and a tax adviser. – littleadv Feb 6 '16 at 8:27
  • If you know the money is going to college in particular, you could also consider 529 funds. Your trust or UGMA may have FAFSA implications which the 529 is explicitly immune to. – Kevin Feb 6 '16 at 17:38

While not entirely untouchable, a college fund can also be in the form of an Indexed Universal Life (IUL) contract through a life insurance agent. These often net a higher rate of return annually than any savings account, are not going to tank if the market does, and can be owned by you for the child. If no one else is on the policy, they have no access to it. You can name yourself the beneficiary as well. There's several very nice features to doing your child's college funding this way.

  1. You can ask that the contract is established for maximum cash value. This means the death benefit isn't the overriding need so the premiums you pay fill the cash value of the contract much more quickly.

  2. As mentioned in point 1., the contract has a death benefit. No other savings device will grant you this. Heaven forbid the child passes while you are saving for college. Now you will have a tax free benefit that will pay for burial and other related costs and can be used to fund yet another IUL policy if you have more than one child.

  3. Unlike other policies, you can set your minimum monthly premium and have the flexibility to add as much as you would like to fill the fund faster if you happen to come into more money and you want to direct it to that contract. There are ceilings to this so that you don't create a modified endowment contract (MEC. Look this up at investopedia), but this is specifically stated in your illustration so that you can keep your contributions a penny under that limit.

  4. Unlike college loans, you have extremely quick access to the funds when you need them (probably counter-intuitive to your desire for untouchable money). This can be achieved a couple of ways. You can borrow money from the insurer using your IUL cash value as collateral. Often, a check can be cut within 48 hours. This eliminates the time a normal lender takes in making the loan decision. Or, you can surrender the policy and take the cash value (paying taxes on your gains). The first keeps the policy in force while you pay back the loan if you desire. The second cancels the policy so that you can take your own accumulated money out.

  5. Utilizing an IUL in this manner can (but not always) lower your Expected Family Contribution (EFC) with colleges so that you could qualify for higher student aid. If your income puts you in the middle class, you would be wise to note this in particular. Having control over your EFC is major benefit. (If you'll read the link above, you notice the UGMA isn't necessarily the best idea as schools look to the student to give a higher percentage of their own assets than the parent.)

Ultimately, while the IUL is a little known method for saving for college (and some will argue what they may) it would benefit you to speak with an insurance professional about this option. Ask if the insurer has access to the SAGE Rewards program (https://secure.tuitionrewards.com/). The program is a free benefit if you purchase a cash value contract like an Indexed Universal Life policy and activates IF the agency participates. The child earns tuition credits for every birthday of your child (not retroactive) and for having the policy. If you do an annual review, you earn more tuition credits. I have established these for clients and some have sent their child to college with more than 44k in college funding (split out over four years). The point system is 1 credit = 1 tuition dollar. Quite unlike air miles!

For those of you reading this that have similar concerns, please consult an with an agent (or feel free to contact me) to get up to date advice on how to structure these. They are simple and efficient and have significant upside for college funding.

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    Really? At the end of the day, this is still a life insurance policy for a child, which sounds like a horrifically bad investment. Even if there's a cash value, a non-trivial portion of your money is going into an insurance premium that you likely don't want or need. In the unlikely and unfortunate event of a death, you can use literally any other savings mechanism to pay for burial expenses (which costs an awful lot less than college). – Zach Lipton Feb 7 '16 at 0:24
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    That sounds more like advertisement/solicitation than an answer to the question asked. You're specifically pushing a product with no regard to any other alternative, and not a good product at that. – littleadv Feb 7 '16 at 0:54
  • Really! An insurance policy of this nature isn't an investment. It's savings. And I was clear in its uses so stating that it's a life insurance policy for a child is simply redundant. Right now, a lot of investments in the market are hurting. What I propose is a safe haven. Let's also not forget the 'non-trivial' portion of your money that pays for fees in investment accounts as well as the risk, and volatility the market provides. I'm merely suggesting one way to fund for college. The IUL plus the SAGE Rewards program is the major benefit here. Asking a pro can't hurt, can it? – LHawley Feb 7 '16 at 0:56
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    I'm not understanding how this is an answer to the question. What aspect of this solution makes the savings "inaccessible" to the parents? – Dan Getz Feb 7 '16 at 1:37
  • College Aid: Don't take the bait. A College-Savings Strategy That Could Flunk Out. These policies can be obscenely profitable for agents (like you apparently) and insurers, with high commissions and ridiculous management fees. With a life insurance policy, every dollar that goes to premiums and commissions is one that's not going to the actual goal: savings for your kid. And, of course, the cash value of the policy is immediately accessible to the parents. – Zach Lipton Feb 7 '16 at 7:01

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