Providing financial gifts to children can be a great way to establish a life-long path to learning how to manage money. In addition, providing investment vehicles will also provide minors a nest egg to get started. Most states (except Vermont and South Carolina who use “Gifts” (UGMA)) have adopted the Uniform Transfers to Minors Act (UTMA) that allows an adult to provide gifts to children in the form of securities or real estate. There are some good financial instruments to give as a gift to a minor.
Mutual funds
Mutual funds, although subject to market fluctuations, can be a good financial instrument to give as a gift to a minor. The account would be set up as a custodial account with the adult making the decisions as to how the funds are invested. Over the long term, these accounts can provide good returns.
Adults who use mutual funds should seek competent financial advise for these accounts. It is important to remember that these accounts are set up with the adult as a custodian. The adult then assumes a fiduciary role and the money technically belongs to the minor.
Savings bonds
The Department of the Treasury allows adults to purchase savings bonds in the names of a minor. These bonds will accrue interest in accordance with the rules of issuance. Some bonds may be purchased for as little as 50% of face value. Savings bonds are typically one of the safest investments that can be made for a minor.
529 Accounts
College savings accounts are a good investment instrument for minors but do have drawbacks. If a college account is set up for a minor and they do not attend college the gift may become taxable both on a federal and state level. Another challenge with 529 accounts is that they may adversely impact the student’s ability to obtain financial aid for college.
Passbook savings
Passbook savings accounts are another safe investment option for minors. Passbook savings accounts may be set up at nearly any bank and may be set up directly in the name of the minor or as a custodial account. Account structure will be determined by the local bank.
Summary
There are several options that are available to adults who wish to provide a financial instrument as a gift to a minor. The decision should be made based on the amount of money that is involved and the intent of the minor. It is important to remember that when an account is set up as a “Uniform Transfer to Minor Account” (or Gift account in SC and VT) that the funds in that account are considered irrevocable. There are tax benefits that accompany gifts to minors. Before making any type of investment for a minor the parents of the minor should be consulted.