Last month, Wade Lawrence, from City State Bank, wrote a wonderful article for this magazine on setting up a Roth IRA for a minor. If you did not read it, go find it and read it.
It is a difficult challenge to put money aside for a minor. Here is a recent situation we encountered.
Sally died. Her family requested that, in lieu of flowers or donations to her spouse, donations be made for a scholarship fund for Sally’s grandchildren. About $4,000 was collected in donations. Frank, Sally’s husband, and Julie, Sally’s daughter, opened a joint bank account calling it the Sally’s Grandchildren Scholarship Fund. However, there was no legal entity set up to own the account. That was just a fictitious name. Frank and Julie were the legal owners. Also, there was no document that set out the terms of the scholarship. Who could get money from it? Under what circumstances could they get money? How much money could they get? All the grandchildren were very young, so no one took the time to work out the details.
Frank eventually needed to go to long term care. And, since he was a legal joint bank account owner, the state determined that half the money in the account belonged to him. The account had to be liquidated before Frank could qualify for Medicaid benefits AND he could not give the money away. He had to spend it on himself.
Had Frank wanted to set up a legal entity to hold the scholarship money, the cost would have been between $2,000 and $5,000; cost prohibitive given the amount of money available.
If the donations had been split and used to establish a ROTH for each grandchild, the entire situation could have been avoided. Also, a Roth gives grandparents and other family members a very nice landing place for gifts to children whose parents already provide most everything they want.
Under current tax law, when it comes time for college, contributions made to a Roth can be withdrawn without penalty or tax, but not the interest or dividends accrued. Is this better than the 529 plan option? Yes and No. Donations to a 529 plan are tax deductible. Donations to minor’s ROTH are not. However, a 529 plan is revocable, so it would have had to be liquidated in the above situation, whereas the Roth IRA plan would have survived.
