Posted On: June 10, 2010
Investing Your Child's Money
As of now, in the state of California, there are limited alternatives for investing a child's money. Two factors influence the court's evaluation of proposals for the investment of a child's funds recovered from a settlement:
- The child's status as a dependent and whether he is supported by his parents until the age of 18 as a legal responsibility.
- The money belongs to the child and must not be unreasonably administered. Allotting small portions to the child between the ages of 18 and 30 would be inappropriate, though putting a large portion of funds toward college or "transition to adulthood" expenses at the age of 18 is appropriate.
The investment alternatives used by courts in California include:
- If the child's estate is less than $5,000, the court can authorize release of the money to a parent on the child's behalf. Spending restrictions will not apply and the money should be delivered to the child on his 18th birthday. The parent will sign a receipt when receiving the money, which will be filed by the court.
- If the net recovery of funds is less than $10,000 and the child is over 12 years of age, or if the funds are needed before the child reaches 18, the court can allow the parents to deposit the money in an FDIC insured deposit account which is "blocked" so nothing can be released unless authorized by a separate court order. If this is done, make sure to ask the court for permission to deposit the money in a CD or higher earning account and not a "passbook savings" account. This will maximize yield. The 18th birthday is the latest maturity date.
- If the net recover is large, the court will want the petitioner to make arrangements for a schedule of periodic payments to the minor over time. Authorized by a probate court, the money can be spread out past the child's 18th birthday and is ideal for college planning. If the settlement is structured and documented properly, it will meet the requirements of the Federal Tax Code and not be subject to taxes and "income tax free" because it is a payment for personal injury, not money invested.
- If the child has special needs, the money recovered from a personal injury settlement can be put into a special needs trust. If the child is receiving "needs based" public benefits (including SSI and Medi-Cal), the funds must be recovered carefully in order not to upset the public benefits. Payments from the trust can not cover usual living expenses covered by governmental benefits, or anything covered by governmental benefits, without affecting the beneficiary's eligibility. For a special needs trust, a "declaration of trust" must be established and written by the court and will require existing liens to be paid before the trust is funded. All of the benefit programs the minor receives must be declared, then a special needs trustee can administer portions of the funds to invest or manage.
