Trump Accounts' Bait and Switch: What Parents Aren't Being Told About Their Kids' Investments

Trump Accounts were sold as a simple way to build children's wealth through diversified investments. But last-minute Treasury Department changes created a system that lets wealthy donors put shares of individual companies into children's accounts without parental approval. At the same time, families may have no way to opt out. 

What started as a questionable investment option has become something parents will not even have the opportunity to refuse.

Richard Rubin and Ashlea Ebeling of the WSJ originally broke the story, and that's how I learned about the changes, changes that feel like a bait-and-switch. PBS NewsHour interviewed Richard Rubin last week, the author who broke the story. You can watch the interview here.

I wanted to learn more myself, and of course, share it with all of you. I turned to Feraud Calixte, a Certified Financial Planner™ and Juris Doctor. I quoted Feraud multiple times throughout this post.

Feraud is affiliated with the CFP Board, Alliance of Comprehensive Planners (ACP), the National Association of Personal Financial Advisors (NAPFA), and the Fee-Only Network. He is an NYU and Duke graduate. Click here to learn more

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Three Big Changes

There are three primary changes. The first is automatic enrollment, which means the government opens the child's accounts. The second change is that parents can’t stop it. The third is that billionaires can donate individual company stock.

Automatic Enrollment

Children automatically enrolled in Trump Accounts include all U.S. citizens under 18 with a valid Social Security number.

The Trump administration spent a lot of energy rolling out Trump Accounts, but signups were low relative to that effort. Parents need to know where to open the accounts and how to navigate IRS code jargon, both obstacles that can be too much to overcome.

Auto-enrolling children has now increased participation rates 10x. I’m typically a big fan of auto-enrollment because it helps folks save more. You can point to the 10x increase in Trump Account participation as an example of success. 

But a well-intentioned tactic is being used in a way I’ve never seen. Now, children are forced to accept something they might not want. 

No Opt Out Option

Imagine waking up to discover the federal government opened an investment account for your child. A billionaire then deposits stock from a company you have never heard of. You didn't select the investment, you can't reject it, and you can't sell it for five years. That’s now the case.

“According to the program’s current help center, parents cannot opt out of automatic account creation. Leaving an account unclaimed does not close it or stop its money from remaining invested,” according to Calixte. 

“Parents can choose not to contribute their own money. That distinction matters: declining to fund an account is different from declining participation.”

Calixte is right; parents aren't forced to fund it, and that distinction matters. However, I prioritize my own morality over money, and I don’t want anything to do with anything that has Trump’s name on it, and I know others feel the same.

Donating Individual Stocks

Under the original investment framework, account contributions were directed toward low-cost U.S. stock index funds. As I shared in a past post, I did see this as enough diversification. Parents should also have the opportunity to invest globally. 

But now, it’s much worse. The federal government went from encouraging diversified investments under uniform rules to letting certain donors decide which individual stocks millions of children receive.

I asked Calixte to explain, as if I were a small child, how the new donation loophole works. Here is his response: 

“This new provision lets an approved gift add shares of one company instead of a diversified fund. An individual generally gives through an eligible charity, which works with Treasury to distribute shares to a defined group of children. Eligible stock must be publicly traded shares of a U.S. corporation. These are donated shares, and the family's existing savings are not used to buy them.” 

According to Calixte, the qualifying donation does not use up the general $ 5,000 annual contribution allowance. If the investment declines, the child has lost some of the gift's value; that does not automatically mean the family's own contributions were lost.

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More Problems

According to WSJ reporting, the combination of auto-enrollment and stock donation opens up possibilities that weren’t previously imaginable. Here are some hypotheticals for how donations could be used or leveraged:

“Executives could combat policy proposals by invoking the effects on their child shareholders if every 9-year-old owned two shares of a bank, a corporate-tax increase or tightened regulation would hurt the kids.

A CEO whose company wants to build a data center in a county could put stock directly into accounts of the area’schildren as an inducement for support or a reward for approval.

An ideologically minded donor could make families own shares in companies they might oppose—giving stock of firearms makers to Manhattan’s 4-year-olds or casino company stock to Utah’s 8-year-olds.

People with legal or ethical prohibitions against family ownership of individual stocks—like employees of regulatory agencies—would own them unless the government allows exceptions.”

Alternatives to Trump Accounts

Calixte shared that there are plenty of other non-college savings options parents can use to help their children build wealth:

Custodial (Kiddie) Roth IRA

Worth considering when the child has legitimate earned income. Contributions cannot exceed eligible compensation or the applicable annual IRA limit. An allowance or cash gift alone does not qualify as earned income (but there are ways around this). 

I am a big fan of this type of account. All three of my children have one, now converted into Roth IRAs, which are substantial seeds for their future. Click here to see a Trump Account vs. Kiddie Roth IRA comparison.

Brokerage account (owned by the parent)

Parents retain control over investments and when to provide financial support. The assets remain theirs, with the associated tax consequences.

Custodial UGMA/UTMA account

The gift belongs to the child. An adult manages it until control transfers at the age specified by state law. Parents should be comfortable with that eventual handoff.

Savings accounts, CDs, or Treasury savings bonds

These can suit goals where stability matters more than stock-market growth. EE and I savings bonds can be given to children.

Professional Support

Wealth Planning

Feraud Calixte, a Certified Financial Planner™ and Juris Doctor. He is affiliated with the CFP Board, Alliance of Comprehensive Planners (ACP), the National Association of Personal Financial Advisors (NAPFA), and the Fee-Only Network. He graduated from NYU and Duke. Click here to learn more. 

Personal Finances 

I'm the only Certified Financial Therapist™, Accredited Financial Counselor®, and Fair Play Facilitator®, and I empower high-achieving couples with systems to manage money and the home as a team—drawing on decades of national leadership and lived experience.

Click here to learn more about how and when I can support you.

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