‘I just don’t trust my sister’: How do I gift money to my nieces without their mother having access to it?
Dear Moneyist,
I am a devoted aunt to twins. This year, they are turning 13. Their mother and I have had problems in the past. We are sisters and fight like sisters. But I’d still like to be able to gift the kids monetary presents as they grow up. I was thinking I’d like to give each kid $500 this year.
But I’m worried about their mother having control over the money. I just don’t trust my sister. She has a history of spending recklessly. I’m also concerned that if we fight again, she might tell them, when they are ready to take over their finances, that the money came from her or someone else.
I am wondering if there is a way I can gift them money now and over the next few years, but not have my sister controlling the money. I’m happy with the idea that the money will be unavailable to them until they are 18 or ready to open a bank account of their own.
For now, I worry if I open a bank account for them and tell them about the money sitting there, my sister will wonder why I don’t just let her put the money into the account she controls for them. It will actually cause a fight, which is something I spend a lot of time trying to avoid.
My question: Is there a way to gift money to children that protects it from their parents without it seeming like I’m overtly protecting it from their parents?
Aunt
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Dear Aunt,
You’re doing a nice thing.
I understand that you want the money to reach the beneficiaries when they turn 18, and have it not ruffle any feathers in the meantime. First, some unsolicited advice: Don’t expect anything in return from your sister in terms of good behavior or better relations, assuming it takes two to make or break a relationship.
Amy Richardson, CFP with Schwab Intelligent Portfolios Premium, says custodial accounts, opened under the Uniform Transfer to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA), are common vehicles for this purpose. They offer a host of benefits, some of which Richardson outlines below:
- “Control: An adult must be appointed to act as the custodian (which could be you). The custodian has the ability to invest and withdraw funds for the benefit of the child.
- Flexibility: You manage the investments until the age of maturity is reached by the child (usually 18 or 21). At this time, they receive full control of the account.
- Tax Advantageous: You can take advantage of the annual gift exclusion amount, which for 2021 is $15,000 per person (without any of it being subject to a gift tax). This is an irrevocable gift, meaning you cannot take it back and the funds have been removed for your estate.
- Growth: Capital gains and income earned in the account is taxed to the child, not yourself.”
Alternatively, if you want to help provide financial support for their education, Richardson says you could consider a 529 savings account, which come as “prepaid college tuition plans” and “college savings plans.” They have a host of benefits that are similar to the ones above. (Read more here.) Richardson outlines four benefits:
- “Control: You’re the account owner. You (not your child) have control of when and how your money is spent, even after the person you’re saving for becomes an adult.
- Flexibility: Funds in the account can be used for qualified higher-education expenses (including tuition at a variety of establishments such as: college, university, trade school, vocational school, and apprenticeship programs). You can also use your 529 assets for K–12 tuition of up to $10,000 per student per year at a public, private, or religious school.
- Tax Advantageous: The annual gift exclusion amount also applies to a 529 account. However, you may be able to deduct your 529 plan contributions on your state income tax return up to your state’s limit.
- Growth: While your money is in the account, it benefits from tax-deferred growth (no taxes due on investment earnings/gains). When money is withdrawn for qualified education expenses, withdrawals are federal income tax-free.”
Both she and I agree that the twins are lucky to have such a generous and thoughtful aunt, especially someone who can separate her relationship with her sister from that with her nieces. So often children get lumped in with adult squabbles, extending fractured familial relationships from generation to generation.
Good luck with your gifting.
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