Child Accounts
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CHILD ACCOUNTS: THE CALIFORNIA ADVANTAGE Child Accounts are a bold, new proposal aimed at putting all American children on the path to financial security from the very beginning of life. They would build financial resources for a college education, buying a home, and starting a business. They would connect more families to the U.S. financial services sector, be an important tool in making financial education relevant for children, and help create a new generation of savers and financially-savvy consumers. In 2007, the Aspen Institute Initiative on Financial Security (IFS) proposed establishing a system of Child Accounts in the United States, modeled after the Child Trust Fund in the United Kingdom.1 From birth, every child would have an investment account initially funded through a modest government contribution. Later contributions from family and friends and matching contributions for low- and moderate-income children, along with investment earnings, would Issue Brief help the account grow. May 2008 Isssue Brief What Would Child Accounts July 2008 Look Like? The IFS vision of Child Accounts Key Elements of IFS includes several key elements. At Child Account Design birth, each child will be given a $500 certificate for an investment account. Parents will take these certificates to Under the IFS Child Account a participating financial institution to proposal, accounts would be: open an account, which will grow tax- The InitiativeInitiative onon FinancialFinancial Security Security at free. Family, friends, churches, and • Owned by children themselves atthe the Aspen Aspen Institute Institute is the isnation’s the nation’s leading charities will be able to add up to $2,000 leadingpolicy programprogram policy focused programthat uses on cradle thata business- touses grave a a year in new contributions. Low- • Locked-up until age 18, with business-drivendrivensavings approach policy to to helpapproach create more smart Americansto solutions create and moderate-income families will be unrestricted use thereafter smartthatsave, investhelp solutions Americansand own. that save,help Americansinvest and encouraged to save through a 100% own. save, invest and own. government matching contribution up • Widely available in the private to $1,000 annually ($2,000 maximum on sector all account contributions). The standard Child Account will be • Structurally easy to under- easy to understand and safe, with one stand, with limited investment basic investment fund structured for an options 18-year investment horizon and limits on account fees and expenses. Account • Exempt from taxation funds will be locked up until the child www.aspeninstitute.org/ifswww.aspenifs.org 1 Savings for Life: A Pathway to Financial Security for All Americans, The Aspen Institute Initiative on Financial Security, 2007. Initiative on Financial Security | 271 Madison Avenue, Suite 804 | New York, NY 10016 | 212.895.8070 | [email protected] reaches age 18. At that time the assests can In 1938, although too late for Jackie, Coogan Trusts offer no withdrawals be used for any purpose. Child Accounts California rectified this situation by until age 18 and unrestricted could offer additional incentives for passing the “Coogan Act” to protect withdrawals thereafter. Without a children to use their accounts toward child performers. court order, no funds may be withdrawn education, home ownership, business from the Coogan Trust until the child startup, or retirement income. The modern version of the Coogan reaches 18. At that time, account funds Act is found in Section 6753 of the can be spent for any purpose. Discussion about Child Accounts California Family Code, most recently has largely focused on the amount of revised in 2004. The purpose of the Coogan Trusts are widely available government funding needed and whether law is to protect at least a portion of the in the private sector. California law the political will exists to enact such a earnings of child performers until they permits banks, savings and loans, credit policy. But there is a more mundane become adults. Parents or the child’s unions, brokerage firms, and mutual problem hindering implementation. The legal guardian are required to open a fund companies to offer Coogan Trusts. U.S. saving system today does not offer Coogan Trust in a qualified financial Two important qualifications apply: 1) a private-sector investment account institution before the child can work in the financial institution must be located designed just for children. California. Employers then must deposit in California; and 2) it has to be insured 15 percent of the child performer’s gross and/or registered under standard federal For states that want to create such earnings into the account. The account laws and regulations. accounts, IFS wrote a model state belongs to the child, although the parent statute.2 In addition, several localities usually retains investment control. No Coogan Trusts are simple in structure have recently expressed interest in withdrawals are permitted before the with limited investment options. creating a Child Accounts program. But child becomes 18 and assumes full Coogan Trusts can be invested in only without a suitable account for children ownership of the account. two types of products: 1) mutual funds, that is already available, most localities which, if invested in equities, must be an could not have such a program without How Would Coogan Trusts Work as index or broadly-diversified fund; and 2) either state or federal enabling legislation. Child Accounts? an income generating bond, certificate of California, however, is the exception. deposit, money market fund, or income Although Coogan Trusts are required mutual fund with maturity dates appro- What Are Coogan Trusts and Where only for child performers, they could (Continued on back page) Did They Come From? readily be used as a vehicle for Child Accounts. In Thanks to Hollywood, a unique type of design, they satisfy many of account already available in California – the elements identified by known as a “Coogan Trust” – is quite IFS as central to a successful similar to the Child Accounts proposed Child Accounts policy. by IFS. This gives localities in California the ability to implement a Child Accounts Coogan Trusts belong to program at any time and to lead the way the children themselves. for the rest of the nation. The purpose of the Coogan trust is to preserve a specific The “Coogan Trust” is named after the child’s funds while a minor. child actor of the 1920s and 1930s – The trustee is obligated Jackie Coogan. Jackie Coogan became to make sure those funds famous for starring in Charlie Chaplin remain in trust for that child. movies, such as “The Kid” and, as a Technically, the child is minor, became a multi-millionaire. But named as the beneficiary of a when Jackie came of age, his money Coogan Trust, while a parent was largely gone, spent by his parents or other guardian serves as the who held the legal rights to his income. trustee. Practically speaking, the child is the legal owner 2 Appendix D, The Case for Child Accounts, The Aspen Institute Initiative on Financial Security, 2007. A slightly of the account and assumes revised version is available under the “Publications” link full control at age 18. Jackie Coogan and Charlie Chaplin in “The Kid” (1921). at www.aspenifs.org. Initiative on Financial Security | 271 Madison Avenue, Suite 804 | New York, NY 10016 | 212.895.8070 | [email protected] Coogan Trusts: Participating Financial Institutions (June 2008) Currently Bank/ Type of Minimum Opening Restricted Brokerage Fees/Service Charges Investment/ Interest Rate Deposit to Child Name Account Actors? Child AFTRA/ actors/ $5 one-time deposit 0.25% ($50- Savings SAG Federal $50 actresses fee; no monthly or $1000); 0.75% account Credit Union & annual service fees (over $1000) child athletes Child 0.5% APR; Bank of No monthly fee if Savings $100 actors/ CD rates depend America balance exceeds $300 account actresses on term Savings 0.25% APR; Bank of the Any child No monthly or account/ None CD rates depend West working annual service fees CDs (with on term restrictions) Child 0.20% APR; City National No monthly or Savings $100 actors/ CD rates depend Bank annual service fees account actresses on term Savings 0.41% APR; Downey Any child No monthly or account/ $5 CD rates depend Savings working annual service fees CDs (with on term restrictions) Savings 0.80% APR; First Any child No monthly or account/ None CD rates depend Entertainment working annual service fees CDs (with on term restrictions) Savings account/ None for savings account; Any child $50 annual service Smith/Barney CDs (with Rates vary $1000 for CD/Mutual working fee restrictions)/ funds mutual funds No monthly or Child annual service fees if Savings Union Bank 0.25% APR $100 actors/ account exceeds $300; account of California actresses $3 monthly fee if account is below $300 Savings Child account/ 0.25% APR; Wachovia $75 annual service None actors/ CDs (with CD rates depend Securities fee actresses restrictions)/ on term mutual funds Child No monthly or Savings Wells Fargo None actors/ 0.20% APR annual service fees account actresses Initiative on Financial Security | 271 Madison Avenue, Suite 804 | New York, NY 10016 | 212.895.8070 | [email protected] priate for the child’s 18th birthday. requirements for opening an account, These investment options are roughly the fees charged, and the investment equivalent to those advocated by IFS.3 options available can vary widely from firm to firm. For some, Coogan Trusts IFS advocates tax-free treatment for are a specialized product not familiar Child Accounts so they grow as large to branch staff. Many offer only cash as possible. Unfortunately, Coogan investments, which, in today’s economic Trusts are not tax-exempt. They are climate, pay low levels of interest. IFS’s subject to the same tax rules as any own informal survey, conducted in June other investment – that is, federal and 2008, illustrates the variety of financial The Aspen Institute is an interna- tional non-profit organization found- state taxes on interest and capital gains institutions that participate in the Coogan ed in 1950.