A checking account for your child: some banks are more willing than others to set one up

Kiplinger's Personal Finance Magazine, August, 1998 by Janet Bodnar

Some banks are more willing than others to set one up.

My daughter, who is almost 16, babysits and is often paid by check. I would like to educate her about how a real checking account works, but I have called several local banks and they won't establish checking accounts for minors.

You may be calling the wrong banks--or asking them the wrong questions.

Banks have no uniform policy when it comes to setting up checking accounts for minors. Bank of America, for example, will open checking accounts for teenagers 16 and older as long as they have two pieces of identification, such as a driver's license and a school ID. Citibank, however, won't open a checking account for anyone under 18.

What bothers bankers is that minors can't legally be held to a contract. "What happens if a kid's check bounces?" asks Tom Sheehan, president of Grafton State Bank, in Grafton, Wis,.

But don't take no for an answer. If a bank says it won't open a checking account for a minor, ask if you can open a joint account with your child, which many banks will allow. Grafton, for example, requires that a parent sign the account agreement with kids as young as 16, but only the child's name appears on the check and only the child has to sign it. "Parents don't generally get involved unless something happens," says Sheehan.

Start with your own bank, which may be willing to accommodate a good customer. A community-based bank or a credit union may also be receptive. At the Navy Federal Credit Union, the world's largest, "we play it by ear," says Kathy Zierers, manager of membership services. "But if a child is 16, we'll generally give him or her a checking account, and younger kids can get one if a parent signs the agreement with them." It's best if the parent and child apply in person.

The closest thing to a nationally available checking account for kids is offered by Young Americans Bank, in Denver (303-321-2265), where all the customers are under age 22 and the average checking-account holder is about 16. The minimum deposit to open an account is $50; the minimum to avoid service charges is $150. Depositors with less than $150 pay $2.50 a month plus 25 cents per check after ten checks. The bank is willing to open accounts for customers in all 50 states, although president Linda Childears cautions that out-of-state merchants may be reluctant to accept a check from a Denver bank (Young Americans issues an ATM card but not a debit card).

To cash any check, kids need some form of official ID. "I have my driver's license, and before that I had my state ID," says Tiffany Hill, 16, who got her checking account two years ago/rom the State Employees Credit Union in Michigan. "I get funny looks some, times, but they always accept it," says Tiffany, who works part-time for a golf pro and generally keeps about $40 in her account.

Tiffany's mother, Michele Hill, opened the checking account because she wanted her daughter to get experience writing checks before she went off to college. "I'll definitely be way ahead," says Tiffany. "I feel as if I know where my money is going better than many adults."

A SHORTSIGHTED SAVINGS PLAN

To get my 8-year-old interested in saving, I offered to match anything he put in the bank. But the deal was that he couldn't spend the money on toys--he had to save for a major purchase down the road. Then he got the bright idea that he could put all his allowance away for five weeks, I'd match it, and he could get a new Nintendo game. I said no way. Since then, he's never put in a penny. I can't believe he won't take the match.

Would you take a 100% match for your retirement plan if your employer told you you could never stop working?

For an 8-year-old, a Nintendo game is a major purchase, and five weeks is an eternity. If you object on principle to video games, that's one thing. But setting up arbitrary rules on what your son can buy takes away his motivation to save.

As an alternative, tell your son that once he gets a minimum of $100 in his account, he can spend additional money on anything he wants (within reason). You can gradually raise the minimum balance, but as your son gets older, his goals will become larger and more expensive, his time frame longer, and the match more attractive.

SPENDING A CUSTODIAL ACCOUNT

Could you please explain what authority a custodian has to spend money in a custodial account under the Uniform Transfers to Minors Act?

The Uniform Transfers to Minors Act gives custodians broad powers to spend assets on anything they consider appropriate for the "use and benefit" of the child. That takes in everything from clothes to computers to cars--with caveats.

For instance, custodians may spend money on basics, such as clothing, as long as those expenditures don't take the place of a parent's legal support obligations, says John McCabe, legislative director of the National Conference of Commissioners on Uniform State Laws. Custodians can also spend the money on extras, such as a: car, but should think twice about buying the child a Porsche.