From Michael, a young father who gives new meaning to the phrase “read the prospectus” (or even the phrases “read the brochure” and “read what you’re signing”):
“I have three children, ages 5, 2, and 2 weeks. For my first two, I opened Twentieth Century Giftrusts three and two years ago, respectively. They both have over $7,500 in them, and are doing well, as one would suspect knowing the Giftrust’s track record. When I recently sat down with my newly found financial advisor, the look of horror on his face was upsetting when I mentioned the exisitence of these accounts. I’ve also heard “radio” financial advisors poo-poo the Giftrust fund. The message that I carry away, is that you lose control of that money and it is tied into the fund for a specified period of time. Once you invest, you can’t get to that money unless your child allows you to once the maturity period has been reached and the check is mailed to the child. Did I jump into these accounts too soon without realizing the consequences?”
You did, but you could have done worse.
Investments in the Twentieth Century Giftrust are gifts. They go into an irrevocable trust managed by Twentieth Century. You’ve given this money to your kids and there’s no getting it back. Years from now, on the “termination date,” Twentieth Century will let your kids know what they’ve got (but will not liquidate any investments or send a check unless asked to).
“I’ve never recommended Giftrust,” says my mutual fund guru Less Antman, because he’s leary of accounts that give kids control of college money.
One problem: the kids may choose to use it to spend it on something else. Another: colleges may grab most or all that money before considering financial aid, where if it were yours they’d let you keep a little. (If you’re reasonably well-to-do, this second problem does not apply. You won’t qualify for need-based grants anyway, and your child’s ability to get student loans should not be affected.)
Less feels parents should keep the funds in their own name, “except for the establishment of a small account with minimum monthly contributions in the name of each child as a life lesson on the value of patience and steady investing.”
(I tend to agree, although it obviously depends on the situation and the kid. One exception I’d eagerly make: helping your 14-year-old set up an IRA with the money she earns baby-sitting or cleaning pools.)
But though Michael is stuck with Twentieth Century for the term he explicitly approved in the applications, “this is as much a disaster,” Less notes, “as finding that you are stuck in a business partnership with Warren Buffett. I’d say the odds favor him looking back on his investments in Giftrust as the smartest financial moves he made in his entire life, and a newly found financial advisor who reacts with horror at his choice of Giftrust might best be newly lost again.”
Of course, if he’s uncomfortable that his kids will have control of the money, future investments should go into other funds, in his own name, such as Twentieth Century Vista and Twentieth Century International Equity.
For more on kids and your money, see the August 7 comment, “What Shall We Name the Baby’s Mutual Fund?” (The baby is doing fine, by the way.)
Tomorrow: Persistence and The Truth Machine