Summary of 616 | How Should You Give Money to Your Kids? | 529s, UTMAs, Trump Accounts & More

Overview of ChooseFI Episode 616: How Should You Give Money to Your Kids?

In this episode, Brad chats with CFP Cody Garrett and CPA Sean Mullaney about the best ways to give money to children and grandchildren, with a focus on optionality, sufficiency, and tax efficiency. Rather than starting with account mechanics, they first examine the motivations behind saving for kids, then evaluate whether popular tools like 529 plans, Trump accounts, UTMA/UGMA custodial accounts, and Roth IRAs actually fit those goals. The big message: don’t let the product lead the plan—start with your family’s financial stability, then decide whether any kid-focused account makes sense.

Why Parents Want to Give Money to Kids

The hosts identify several common motivations for saving and investing for children:

• Give them more options than you had
  • More freedom in adulthood
  • Ability to choose meaningful work
  • A stronger launch into financial independence
• Help them avoid the struggles you experienced
  • Avoid student loan debt
  • Break intergenerational patterns of financial stress
• Protect them from unnecessary hardship
  • Help with education, housing, cars, or emergencies
  • Reduce future dependence on parents
• Teach healthy money habits
  • Encourage stewardship, delayed gratification, and financial literacy
  • Build confidence with money early

Important nuance

Cody and Sean stress that giving money is not the same as teaching money skills. A child can learn financial literacy in many ways; legal ownership of money is not the only path.

First Priority: Parents’ Own Financial Sufficiency

One of the strongest points in the episode is that the greatest financial gift to children is parental financial stability.

Why this matters

• If parents become financially strained later, that can burden adult children.
• A gift to kids should not come at the expense of your own retirement, security, or long-term care needs.
• The hosts frame this as the “oxygen mask first” principle:
  • Secure your own financial future first
  • Then consider helping children

Main Account Types Discussed

529 Plans

The 529 is the most established education-focused account and is generally best when you are very confident the money will be used for education.

Benefits

• Tax-deferred growth
• Tax-free withdrawals for qualified education expenses
• Can cover:
  • Tuition
  • Fees
  • Room and board
  • Supplies
  • Computers
  • Some K–12 tuition
  • Some professional credentials / continuing education
• Can be transferred among family members
• Can support multigenerational “dynasty” planning in some cases

Downsides

• Restricted use
• Non-qualified withdrawals trigger:
  • Ordinary income tax on earnings
  • Plus a 10% penalty on earnings
• Can reduce flexibility if the child does not pursue education, receives scholarships, or chooses another path
• Overfunding can be a problem

Best-fit profile

• Parents or grandparents who are already financially secure
• Families with a strong expectation that funds will be used for education
• Some state tax situations may make 529s more attractive

FAFSA note

• A 529 owned by a parent is generally treated more favorably than assets owned by the child
• Grandparent-owned accounts may have different FAFSA treatment, often more favorable for aid purposes

Trump Accounts

This new account type was presented as a kind of child retirement account with some government and philanthropic seeding features.

Key features mentioned

• Government seed contribution for children born in certain years
• Annual contribution limit up to $5,000 for minors
• Invested in domestic equity index funds
• Functions somewhat like a traditional IRA, but without a deduction
• May become relevant for Roth conversion later in life

Why the hosts are cautious

• Very new structure
• Limited provider availability
• Unclear long-term rules and reliability
• Can also suffer from the same problems as other child accounts:
  • Profile mismatch
  • Loss of flexibility
  • Over-optimization

Best-fit profile

• Children eligible for the government seed
• Possibly affluent families with teens who want to build a Roth-like asset for later life
• Even then, the hosts recommend caution

UTMA / UGMA Custodial Accounts

These are taxable brokerage or custodial accounts for a child’s benefit.

What they are

• UTMA/UGMA accounts are irrevocable gifts to a child
• Controlled by a custodian until the child reaches the age of majority
• Can hold investments or cash, depending on the account type

Benefits

• Flexible compared with 529s
• Can be used for many child-related purposes
• Good for earmarking gifts from grandparents or relatives
• Can help with financial education and “real ownership” lessons

Downsides

• The child eventually gains full control
• Weakens parental control and flexibility
• Kiddie tax rules limit the tax benefits
• Not ideal if you want to preserve option value for future needs

Best-fit profile

• Small gifts from relatives
• Situations where the money is clearly meant for the child and not needed for other family purposes

Roth IRAs for Kids

The episode also covers the Roth IRA, which works when a child has earned income.

Key point

• A child must have earned income to contribute
• Contributions are limited by the amount of earned income
• Parents can fund the contribution if the child has qualifying earnings

What the hosts like

• Great for teens with real jobs
• Strong long-term compounding potential
• Tax-free growth and withdrawals in retirement

What they dislike

• Creating fake or contrived income just to justify contributions
• Paying a child for work that would not make sense without the tax benefit

Important caution

• Roth conversions for children can be less useful than people think if the child is still a dependent
• FAFSA and kiddie-tax rules can complicate things

Core Tax Concepts Explained

Step-Up in Basis

Sean emphasized that if you do nothing and leave assets in your own taxable account, heirs may receive a step-up in basis at death.

Why this matters

• Capital gains can effectively disappear at death for taxable assets
• This can be a very strong tax outcome for heirs
• It preserves flexibility until the very end

Important exception

• Retirement accounts like traditional IRAs and 401(k)s do not receive the same treatment

Annual Gift Tax Exclusion

The episode also covered the annual gift exclusion:

• Discussed as $19,000 per recipient in the transcript
• Allows tax-free gifts to multiple recipients
• If gifts exceed the annual exclusion, they usually just reduce your lifetime exclusion rather than triggering immediate tax

Lifetime Estate and Gift Tax Exemption

• Mentioned as about $15 million in the discussion
• Most families will never owe federal estate tax
• For many people, gifting beyond the annual exclusion is mostly a reporting issue, not a tax problem

FAFSA and Aid Considerations

The hosts clarified how account ownership affects college aid formulas:

• Parent-owned assets are treated more favorably
• Child-owned assets are treated more harshly
• Parent assets are only lightly assessed
• Child assets can have a much bigger effect on aid eligibility

Practical implication

If college aid is relevant, holding money in the child’s name can hurt more than help.

Main Takeaways

1. Start with motivations, not accounts

Ask why you want to give money:

• Education?
• Help with adulthood?
• Financial education?
• Legacy planning?

2. Protect your own financial stability first

A child’s future is better served by financially secure parents than by parents overextending themselves.

3. Most child-focused accounts reduce flexibility

The more restricted the account, the less useful it is if life changes.

4. The “best” account depends on the family profile

There is no universal winner:

• 529s: best when education is very likely
• UTMA/UGMA: good for gifts and flexibility, but control eventually shifts to the child
• Trump accounts: new and intriguing, but too early to overcommit
• Roth IRAs: excellent only when real earned income exists

5. Keep option value whenever possible

Sean repeatedly argues that holding assets in the parents’ name preserves the most flexibility and may be the best default for many families.

Practical Order of Operations

The episode ends with a clear framework:

1. Clarify motivations
2. Assess your own financial sufficiency
3. Evaluate optionality and tradeoffs
4. Only then choose the account type

That framework—rather than any single account—was the core lesson of the episode.