Bank Accounts For Children

When you establish a bank account for a minor, you can retain ownership of the money or you can pass ownership to the child. If you establish an account in which you are designated the "custodian" of the money, you have transferred ownership to the child. The money is deemed to be property transferred under the Uniform Transfers to Minors Act and is owned by the donee-minor. The account is held under the child's Social Security number.

During the child's minority, until he or she is 21, the custodian holds, manages, and invests the money. Until the age of majority, the custodian may use the money for the child's reasonable needs. When the minor turns 21, the custodian must deliver the money and proceeds, plus accumulated interest and profit, to the individual. Unlike a trust for support or education, the proceeds of which must be used for the trust's stated purpose, money transferred under the Act generally may be used by the custodian for the child's support. It is, however, the custodian's duty to use the money only for the child's benefit.

If you establish an account "in trust" for a minor, the money in the account is not owned by the minor. Instead, such a trust account belongs to you, the trustee, during your lifetime. The long-recognized common-law trust, sometimes called a "Totten Trust," presumes that an account established in the depositor's name with his own money as trustee for another creates a mere tentative trust revocable at will until the depositor dies or completes the gift in his lifetime.

Funds in a minor's bank account are not completely inaccessible. An Illinois court found that the goal of protecting the financial future of minors does not override a provision of a trust account agreement allowing the bank to set off funds from the account for a minor's debts. In this case, the minor had made unauthorized withdrawals from another account at the bank and refused to pay it back. The bank withdrew money from the minor's trust account and used it to set off the unauthorized withdrawals. As illustrated above, it is vital to review account agreements to insure that a minor's funds are protected as much as possible.

Sometimes, children are beneficiaries under irrevocable trust agreements. Where a trustee holds a child's property under a written trust agreement, the trustee must abide by all of the terms of the agreement regarding the permitted uses of the trust property. Trust money invested in accordance with a trust agreement is maintained in a trust account held under an employer identification number (EIN) issued by the IRS.

Parents may find themselves managing bank accounts that are established for the investment of personal injury proceeds for their children. Personal injury proceeds payable to minors are governed by court orders. While a lawsuit brought on behalf of a child is at first controlled by the child's parent or guardian, the court holds ultimate authority over whether a settlement is in a child's best interests. The court also has control over money paid in a settlement or after a verdict. Typically, court orders specify where parents may invest a child's money and what use, if any, can be made of the money during the child's minority. Parents must seek the court's approval before withdrawing any funds from the account during the child's minority.

Whether you invest for your children on your own initiative or in connection with an established trust or court order, be sure the accounts are properly structured. As to your own investing for your children, consider whether you or your child should be the owner of the money and be sure to take into account the tax consequences of ownership.

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