With careful hands, many parents set out to raise their children and their children’s Uniform Transfers to Minors Act (UTMA) custodial accounts well. Just as parents increase their children’s responsibility each year so that they may grow into productive adults, they also annually contribute additional funds to their children’s accounts so that they may grow into robust portfolios. As the assets gain value, there is often an inflection point for many parents when the trajectory of their kids’ UTMA account value starts to inspire strong opinions. The now relatively high balance, when considered at the full control of their young adult child, causes a flurry of parental emotions. It’s the “Are we creating a spoiled monster?” moment for some, while it’s the “We sure are creating a responsible angel!” for others. And for a few parents, it’s the “I have no idea what I’m creating!?” realization. Any which way you contemplate it, relinquishing a large chunk of money to a 21-year-old is not an easygoing prospect.
In working with different families over the years, we can generalize this transition down to three likely outcomes (or a combination of the three) once the newly minted adults take control of their UTMAs:
- Fund Experience. They use it in a way their parents would deem worthwhile. They buy a house, travel or start a project. It may or may not work out, but at least the money is a learning tool for something productive.
- Invest in Stocks and Bonds. They leave it invested in generally the same way it’s always been invested, in stocks and bonds. They don’t touch it. Maybe they don’t know what to do with it or maybe they just have it in their nature to keep it squirreled away until a driving purpose surfaces.
- Spend it. The third, and generally the least desirable outcome in parents’ minds, is that their child will spend it on consumables rather than worthwhile projects or experiences. The money might fund flashy habits and an unsustainable lifestyle. Not ideal.
To prevent an unwanted outcome, we encourage parents to give their kids an experience with the UTMA before they take full control of the account, ideally one that prepares them for their future in a productive way. If they make a wise investment choice, good! The experience of growing money will empower them and reinforce good financial habits. If they make a poor investment choice, also good! The experience of losing money will make them more cautious in their future investment decisions when the stakes are likely to be higher.
In addition to this hands-on experience, we also recommend routine conversations about financial decisions (yours, theirs… even those of celebrities) with you. When they’re close to turning 21, set an expectation about how the money should be handled. If there is more than one sibling, be consistent in your message as much as possible. Consider whether or not you want them to tell their younger brother or sister about the funds coming their way. The conversations shouldn’t stop when they become adults in the eyes of the UTMA law. Have them work with a money mentor to check in on a regular basis—reviewing performance and discussing financial planning. Although the Wealth Advisors at Laird Norton Wealth Management are available for this kind of financial coaching, a relative or close family friend could also be an effective money mentor.