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Protecting Child Performers’ Earnings

Making it big at an early age is a dream that comes true for a small number of performers and their parents. Careful planning can boost the chances that these child stars will be among the even smaller group who remain successful into adulthood.

Child performers’ parents, guardians and managers concentrate on helping them to develop the skills they need to succeed in a given field. As much as they might believe in the child’s success, many fail to plan for managing that success’s financial component. There is no shortage of stories about child stars whose fortunes were squandered before they reached adulthood, whether as a result of their guardians’ lack of planning, lack of financial acumen or, in some cases, even fraud.

Today’s child stars do not only appear on big screens or stages. Minors can find fame and financial success from a lucrative video game career, a popular Instagram page or a widely followed YouTube channel. Six-year-old Ryan of “Ryan ToysReview” earned $11 million in 2017, according to Forbes, through ad revenue attached to his videos of opening and reviewing toys. These alternative routes to success create new complications to an old problem.

Although most parents and guardians are well-intentioned and want what is best for their children, many find the rules for dealing with a child’s income complex and unfamiliar. The best practices are rooted in the basics of good financial planning, but there are complicating factors. Parents should take time to understand their obligations and consider building a team of experts to make sure their child’s finances will be in the best possible shape once the performer is old enough to take control.

Communication And Transparency

Good communication between guardian and child is especially important when the child is likely to earn substantial income. Parents should bring children into the conversation as soon as they are old enough to understand basic financial concepts. While parents will need to tailor these conversations to the child’s age and maturity level, talking about money early and often is a good habit to establish.

Maintaining detailed financial records is essential for every business and can protect all parties involved with the child’s career. The records will account for all of the child’s money and also will be necessary for preparing accurate tax returns. Financial statements can be used to explain how profitable different activities are; identify the origin and magnitude of expenses; uncover missed payments or uncollected earnings; identify trends and make projections about the performer’s career; and increase trust and transparency among the child’s team.

Even smart, older kids may not fully understand concepts like the difference between gross and net income, or be aware of how much money was spent in the early days of their professional lives. Keeping detailed records will allow parents to show an older child or newly independent young adult exactly where their money went and why.

Ideally, the child should not be in for any surprises when he or she is old enough to legally take control of his or her own funds. As a bonus, open communication will make it more likely child performers will be well-prepared to manage their earnings responsibly once they take over.

Building A Team

Given the many complications involved, most parents and guardians realize they cannot handle all aspects of a child’s entertainment career on their own. At that point, it is important to build a trustworthy and competent team of professionals to help grow, protect and manage the child’s business. The right team will likely include, at a minimum, an attorney and an accountant or business manager; it may also include a personal manager and agent. The team members’ knowledge, experience and connections within the industry can help protect the child from making bad deals or signing disadvantageous contracts.

A parent is likely the first member of a child star’s team. At that point and later, parents are entitled to compensation if they are providing services to the child’s business. However, parents should bear in mind that nearly all professional managers make a living by managing many clients, not just one, and parents should not be charging more than industry standard rates. Parents who remain in a higher tax bracket than their child may also prefer to leave the child’s income in the child’s hands to maximize its value. Those parents who do take a salary should be explicit about this with their child once the child is old enough to understand, and should keep detailed records and paystubs.

Planning For Taxes

Tax problems seem to follow celebrities of any age wherever they go. Parents need to make sure they stay cognizant of income tax requirements for their child because, although the child is legally responsible for filing his or her own return, it becomes the parent’s responsibility if the child is too young to do so.

Starting in tax year 2018, a child will only need to file a tax return if his or her total income equals the standard deduction for single taxpayers ($12,000 for 2018), or if the child has business or self-employment net income of at least $400. Even if the Internal Revenue Service does not require a child to file a return, however, it can be worthwhile to do so to recover any taxes withheld from the child’s income.

Parents should also consider the tax implications of who pays for business expenses related to the child’s career. The performer cannot deduct business expenses that someone else paid. If parents plan to use the child’s income to pay for these expenses to allow the child to take a deduction, excellent recordkeeping is all the more essential, for both the child’s information and the tax authorities. Moreover, if parents decide to lend children money to cover their expenses, they should document and account for these loans.

Again, tax rules regarding entertainers are complicated regardless of the performer’s age. Special rules and documentation requirements for deducting expenses may apply depending on whether the child is an employee or an independent contractor, and whether the expenses are partially personal in nature. The tax filing requirements can also be complicated if the child works in multiple states or countries.

Ownership Of Earnings

When adults earn money, they can generally put it wherever they want and do with it as they please. Children are legally incapable of signing contracts and of directly owning or opening certain types of accounts. Many adults also, probably rightly, question their ability to make informed financial decisions. Therefore, additional planning is required to safeguard minors’ assets.

It is important to understand the laws in the state where the child will work to know the protections they provide and to ensure the rules are followed. For instance, California law specifies that all of a child actor’s earnings belong to the child, not his or her parents. In many other states, some or all of the young performer’s wages are considered family money. Depending on how state laws are worded, children who appear on reality shows or children who perform on YouTube may receive different protections than actors in film or television. Different rules may also apply if a child is an employee or an independent contractor.

California, Louisiana, New Mexico, New York and Pennsylvania require that a portion of a child star’s earnings be deposited into blocked trust accounts, often called Coogan accounts because California’s Coogan Act mandated them to protect child actors. (The law’s name comes from Jackie Coogan, a child star from the early days of Hollywood who later sued his parents over mismanagement of his earnings.)

A Coogan account is simply a blocked trust, meaning that once assets are deposited, no one can withdraw them for any reason until the beneficiary turns 18 and gains full control of the trust assets. In states like California where the child’s employer must automatically set aside 15 percent of gross earnings in a Coogan account, parents can make additions to the trust above this requirement. In addition, parents can voluntarily set up a blocked trust for performers living in states that do not require Coogan accounts by law.

Although Coogan accounts might sound like a good way to protect assets, they are inherently inflexible. Parents cannot withdraw assets once contributed to the trust, even to spend the money for the child’s benefit. Blocked trusts are, of course, not the only type of trust available. For instance, parents may wish to structure a trust so that the child gets access to a certain amount of income annually and then receives control of the balance entirely or in stages when he or she reaches adulthood. Trusts can be incredibly flexible and structured in just about any way you can imagine. Despite this potential flexibility, at times it may be more beneficial to consider creating limited liability companies, partnerships or corporations to own and protect a child’s assets. The best ownership structure will differ based on the situation, so it is important to consult an expert.

Because minors are limited in the ways they can own property and the manner in which they can use or dispose of it, parents may also consider a custodial account instead of a trust. The Uniform Gift to Minors Act and the Uniform Transfer to Minors Act established these accounts, usually abbreviated UGMA and UTMA, to allow minors to own securities and other financial assets. These accounts are managed by custodians or trustees who have a fiduciary duty to manage the account’s assets prudently on the minor’s behalf. Parents usually serve as custodians, but legally any adult can serve in this capacity. Depending on the state and the account type, the child gains control of the assets at either 18 or 21.

Planning For The End

While it is sad to think of a child star’s career winding down due to lack of work, the child’s changing interests or even unforeseen tragedy, preparing an exit strategy is prudent. Ensuring the child receives proper schooling will help the transition to a different career if his or her success turns out to be fleeting. Long-term disability insurance can protect against the child’s loss of income if he or she becomes disabled, and life insurance will provide for those that have become dependent on the child’s career in the unlikely event of his or her premature death.

Estate planning is crucial for both the performer and parent. Although the child’s greatest asset is likely his or her earning potential, the child’s estate plan should include provisions for dealing with intellectual property considerations too. As for parents, they may want to consider whether it makes sense to separate the functions of raising their child from those of managing the child’s career and finances when nominating a potential guardian.

Most parents want their children to thrive, which includes encouraging them to do what they love and making sure they have the best financial start in life possible. For parents of young performers, managing both can be a complicated but ultimately rewarding endeavor. When it becomes too much to handle, don’t be afraid to look for help.

Senior Client Service Manager and Chief Investment Officer Benjamin C. Sullivan, who is based in our Austin, Texas office, contributed several chapters to our firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55, including Chapter 13, “Federal Income Tax,” and Chapter 16, “Investment Psychology.” He was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.
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