Suze Orman, renowned for giving financial advice on her "Women & Money" podcast, recently advised a woman looking to open brokerage accounts for her four grandchildren, aged 7, 5, 2, and two months. Now retired with her husband, Cheryl wants to help her grandchildren secure their financial futures instead of "wasting money on junk." Orman, however, expressed that a brokerage account was the wrong way to go and offered an alternative suggestion.
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First, Orman explained how Uniform Gifts to Minors Act (UGMA) brokerage accounts work. "If you open up a Uniform Gifts to Minors Act account or Uniform Trust to Minors Act (UTMA) account, that’s money that is theirs," Orman stated. "And once they turn of age, they can do anything they want with this money."
According to Fidelity, the custodian of a UGMA or UTMA account must transfer the account to the child it was set up for at a young age – usually between 18 and 25. At that point, that child can use the money for any purpose.
Orman also highlighted that these accounts can negatively impact financial aid eligibility, complicating future educational opportunities for the children should they seek higher education.
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Instead of UGMA or UTMA accounts, Orman recommended an approach where Cheryl would have more control over the money. "I would open up a side account and keep it in your name, knowing that money is for those kids. I would then create a trust where there are instructions on when those kids can get the money."
Orman's reasoning behind this, beyond financial aid impacts, is that you don't know what those children are going to do with the money when they get older, stating that they could develop a drug problem or make a large purchase they shouldn't make. If Cheryl wishes to provide a secure financial future for her grandchildren, Orman says that she should have more control over that money to ensure it goes toward her intended purpose.
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Some people may want to save for their children’s or grandchildren's education, so Orman suggests setting up a 529 account. Unlike a UGMA, the original owner of a 529 account maintains ownership until the money is withdrawn, which can help ensure it goes toward its intended use.
While Orman suggests that a trust or 529 account is a better option for those wanting to maintain control of the money, setting up a UGMA account for your child or grandchild isn't bad. It can be a wonderful gift to help them get the financial start they need in young adulthood. It can even help them learn the importance of investing and financial responsibility from a young age.
If you're ready to take that step and start setting aside money for your children or grandchildren, consider talking to a financial advisor or tax consultant. They can answer your questions and help determine the best route based on your unique situation.
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This article Suze Orman Advises Against Opening Brokerage Accounts for Kids or Grandkids. Here's What She Suggests Instead originally appeared on Benzinga.com
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