If you are a parent or guardian in California, it is important to know that the law requires you to manage money received on behalf of a child in a particular way. This ensures that the child’s financial interests are protected and that the money is used for the child’s benefit.
California probate and estate law for a minor child
According to California probate and estate administration law, a guardian must hold any money received on behalf of a minor child in a blocked account or custodial account until the child reaches the age of majority (18 years old). This includes money received through gifts, inheritance, or settlements.
A blocked account is a type of restricted savings account that cannot be accessed by the account holder until a specific event occurs (such as the child reaching the age of majority). A custodial account is a type of account set up and managed by an adult (the custodian) on behalf of a minor child. The custodian controls the account and can use the money for the child’s benefit. Still, the child becomes the account owner when they reach the age of majority.
It is important to know how the guardian intends to use the money received on behalf of a child. For example, in California, the law requires that you use the funds for the child’s “support, education, and general welfare.” This means that the guardian should use the money for food, clothing, shelter, medical expenses and other necessary expenses.
Money for education and tuition
Suppose you are planning to use the money for education expenses. In that case, it is important to know that California state law allows for creating a qualified tuition program (a 529 plan) to save for a child’s higher education expenses. A 529 plan is a tax-advantaged plan for savings specifically designed for educational expenses. Contributions to a 529 are not tax-deductible. Still, earnings on the account grow tax-free, and you can withdraw them tax-free as long as you use the money for qualified education expenses.
Taxable child’s income
It is also important to consider the tax implications of receiving money on behalf of a child. In California, any money accepted on behalf of a child is viewed as the child’s income and is subject to income tax. As a parent or guardian, it is your responsibility to report the child’s income and pay any due taxes.
When a child receives an inheritance, take special care in how you handle the assets. You must follow California laws.