From Red Envelopes to Real Wealth: Managing Our Kids' Money ????

The holiday season is just around the corner, and for many of us from Asian backgrounds, that means receiving red envelopes (红包 or 利是) from family. This tradition is a gesture of love and good fortune, and as kids, we were always so excited to open those red packets—only to hear mom say, “I’ll save this for you!” And, well… that money would disappear into the abyss, never to be seen again! ??

Now that we're parents, we wanted something better for our kids' money. Instead of the traditional “I’ll hold onto it for you,” we wanted to create a system where their money could grow, be invested properly, and most importantly, teach them about the value of wealth-building. Enter UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gifts to Minors Act) accounts, the game-changer for how we manage our children's financial future.

What Are UTMA & UGMA Accounts? ??

In simple terms, these are custodial accounts where an adult (typically a parent or grandparent) manages the assets for a minor until they reach adulthood, which is usually between 18 and 21 depending on the state. The cool part? The money in the account legally belongs to the child and is transferred to them once they hit adulthood. So it’s like a modern-day red envelope—one that actually grows and can be tracked along the way!

Unlike the traditional “I’ll save it for you” approach, UTMA and UGMA accounts put the money in the child’s name, but allow parents to manage it until the child is old enough to take control. It’s a fantastic way to set your kids up for long-term success, all while giving them some transparency on how their money is growing.

What Are the Key Features? ??

Ownership: The assets in the account are irrevocably the child’s, and once they reach adulthood, they gain full control. This might be a double-edged sward ??

Flexibility: You can use the money for anything that benefits the child—such as Medical expenses, Summer programs, School clothes, etc. not just education. It’s a way to give them financial freedom and options!

Tax Benefits: The first $1,300 (in 2024) of income from the account is typically tax-free, with anything above that taxed at either the child’s rate or the parent’s rate.

Financial Aid Impact: Keep in mind that these accounts are considered the child’s assets, which could affect financial aid eligibility more than a 529 plan might.

What’s the Difference Between UTMA & UGMA? ??

UGMA is relatively more straightforward. It holds financial assets and gives the beneficiary control when they reach the age of majority, which is usually between 18 and 21, depending on your state. UTMA accounts offer more flexibility, holding a wider range of assets and often giving control at an older age.

Asset Types: UGMA accounts can hold financial assets like cash, stocks, bonds, and mutual funds. UTMA accounts can hold both financial assets and physical property, such as real estate or artwork.

Age of Majority: This varies by state but is typically between 18 and 25. Some states, like Florida, let you choose when the beneficiary gains control of the assets. In Arizona, the age of majority for UTMA accounts is 21.

Availability: UGMA is no longer offered as a new account option in most states (Vermont is the only state that still offers only UGMA accounts and has not adopted UTMA), existing UGMA accounts established before the transition dates may still be active in those states.

How We Manage Our Kids' Money

Disclaimer: This is not Financial or Tax Advice.

So, what are we doing for our own kids? Well, our approach is a combination of modern financial strategies and traditional ones. We started by funding their 529 college savings plans to take advantage of state tax credit and tax-free education savings. But we also wanted them to understand the concept of wealth-building early on.

That’s where the brokerage accounts come in! Instead of letting the gift money just sit there, we put it in our brokerage account and invested it in low-cost index funds on our kids' behalf. The best part? Our kids—currently aged 7 and 4—get full transparency. We review their account balances together from time to time, explaining how their money is growing, how investing works, and why it’s important. As of now, their accounts have grown to over $2,000 and $1,400, respectively! ????

Looking ahead, we’re excited to set up Roth IRAs for them once they start earning money from part-time jobs or side hustles. That way, they can start building a nest egg early on with that sweet tax-free growth! ??

Beyond the Basics: Planning for Generations?

But we’re not stopping there. As we think long-term, we’re also considering trusts for our kids and future generations. Trusts will allow us to control how the money is distributed and ensure it’s passed down in the way we want. This way, we can build a financial foundation that supports the dreams of not just our kids, but their children and grandchildren as well.

Why It Matters??

By using UTMA and UGMA accounts, 529 plans, Roth IRAs, and other smart financial strategies, we’re teaching our kids about saving, investing, and growing wealth—while ensuring they are in control of their financial future. No more wondering where the money from those red envelopes went! Now, it’s about giving them the tools to build real wealth and helping them understand the importance of planning for the future.

So, how are you planning for your kids' financial future? Are you still holding onto those red envelopes, or are you exploring ways to set them up for success? I’d love to hear how you’re managing your kids' money and building their wealth! Let me know in the comments! ??

#KidsWealth #GenerationalWealth #FinancialFreedom #UTMA #InvestingForTheFuture