Live From The Field

Whose money is it?

After years of renting, a friend of mine just bought his first house. His timing couldn’t have been much better. He got a great deal on the property, and a 30 year mortgage under 4%. Way to go!

In putting together his finances, he had to figure out from which accounts to get his down payment money. He has the usual mix of bank accounts and a brokerage account. Like most of us, his brokerage account has taken a beating lately, so if he sold any stocks he’d be locking in his losses. His consolidated banking statement showed a checking account and three savings accounts, into which he had been making automatic monthly deposits. Two of the three savings accounts were titled, “In trust for …” his nephews.

Being single, he thought it would be nice to put money away for his two nephews to help them out later when they went to college, got married, or bought a house. So, for many years he had been stashing money away for them in these accounts. He’s never even told them.

When he asked for advice as to which securities to sell to finance the down payment of his home, I suggested using some of his cash instead. Between the three savings accounts there was more than enough money available. He could sell some stocks over time to replenish the accounts, and hopefully avoid taking a big hit.

He didn’t realize that he could take money out of the two accounts held “In trust for” his nephews. He was under the impression that he had essentially given them the money already, that they were “trust funds.” I had to explain that in order for a gift to be legally effective, the person making the gift has to intend to give it, AND the gift must actually be delivered and accepted.

What my friend had actually done was set up what is known as a Totten trust by titling the accounts as he did. He didn’t realize that these “trusts” could be revoked at any time by him, either by closing the accounts or by executing a will which disposes of the property in the accounts. He was also shocked to learn that he is still responsible for all of the taxes, and the funds in the accounts could be reached by his creditors during his lifetime.

My friend ultimately decided not to use the money that he had allocated for his nephews for his down payment, but we have set up a time to put together real trust funds for the kids, ones that would leave him in control of the money while protecting it from creditors (his and theirs), and give him the satisfaction of knowing that he was able to provide a little something extra for his family.