Turning 18 years old is a monumental milestone, full of new “privileges.” Once your child is 18, they are legally an adult, they can vote, and, in most states, they gain more driving freedom. With greater privileges come greater responsibilities, including financial ones. In this article we discuss important financial considerations that come into play with your child’s 18th birthday.
Custodial Account Changes
If your child has a custodial account, age 18 can bring about significant changes. In some states, age 18 is the “age of majority.” The “age of majority” is when the child for whom the custodial account exists takes full control of the account.
When your child turns 18, in most cases the account will become restricted until it is transitioned into your child’s name. You will no longer have access to statements or other aspects of the account. The money in the account is now 100% their responsibility, removing you as the acting custodian. They now have the “freedom” to access and make decisions on how to use the money. Depending on how large or small the value of the account is, this new responsibility could carry great significance for their future.
What to do if you are the custodian.
If you are the custodian to your child’s account, here are some important aspects to consider and discuss with your child prior to their 18th birthday.
- What were these funds intended for? Did you intend the funds to be used for your child’s education, living expenses while in college, a future home down payment, or any other specific purpose? Having an open dialogue with your child prior to their 18th birthday can be helpful in charting a solid path forward for them once the funds are their responsibility. Now is the time to address and clarify their expectations of receiving financial help from you later on.
- Should any child-related expenses be paid to you? If you wish to be reimbursed for any expenses incurred for the benefit of the child named on the account, such reimbursements should be processed before your child’s 18th birthday. You will lose control as the custodian of the account at such time if this is the age of majority on the account. This is a particularly important consideration if you have concerns about the level of your child’s financial responsibility.
- Are the funds appropriately invested? Once the account fully transitions to your child you will no longer have control over the investments in the account. Reviewing the investments with your child while you still have control is prudent. If your child is unfamiliar with the basic principles of investing, take the time to explain the fundamentals.
- Help your child think this through. Encourage your child to take the proper time to evaluate their best steps forward, especially if it is a large amount of money. You don’t want them to make a rash decision that they may later regret. Taking time to assess the situation and having an open dialogue with your child before doing anything with the money is important!
NOTE: In some states a custodian can specify the age at which the child takes full control over the account (age 18, 21, or even 25).
One of the new opportunities available to your child at age 18 is obtaining a credit card in their name. Credit cards can allow them to establish credit history, but they can also get them into financial trouble if not used with discipline. If your child opens a credit card, they need to monitor charges and balances regularly. This can easily be done with the use of apps. They need to ensure they’re not incurring a bill that they can’t afford to pay off. Credit card companies charge fees on unpaid balances, and the fees are often in excess of 20%. Unpaid balances combined with compounding interest charges can easily make credit card debt unwieldly and very difficult to repay. Be sure to counsel your kids about the pros and cons of credit cards, and how to use them wisely to avoid costly mistakes.
Almost everyone has heard the quote “hope for the best but prepare for the worst.” It is always important to be proactive rather than reactive. This is even more essential once your child becomes an adult. At a minimum everyone over the age of 18 should execute a Power of Attorney (POA) and a Health Care Directive. Having both documents is an important precautionary measure in the event a person is unable to make their own decisions, and can prevent additional stress for family members and friends in case of an emergency.
A POA is a legal document that designates an individual as authorized to act on your child’s behalf if they become incapacitated. A named POA agent can act on a broad range of matters, including financial decisions. A Health Care Directive is a document that grants someone the authority to make health care decisions on your child’s behalf if they are unable to do so. Once your child turns 18, you no longer have a say in their healthcare unless you are named in an official Health Care Directive.
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