An Inheritance at 21? How the White Coat Investor’s ’20s Fund’ Works

Money conversations are not off-limits in Jim Dahle’s household. In fact, The White Coat Investor founder and his wife talk to their four children about finances all the time.

On a recent episode of The Long View podcast, Dahle told us why he thinks these conversations are important: “You don’t want them to have the experience you had probably, which is you walked out into the world at 18 or 19 or 20 years old knowing nothing and had to learn everything by experience.”

So Dahle taught his kids about debt, investing, insurance, retirement accounts, and more. But he also set them up with a 20s fund. “They have some funds for their college and for their 20s and those sorts of things, and they own basically all the stocks in the world in those funds. When we drive down the street, and we drive past McDonald’s MCD, I point out, ‘You own that.’ We drive past Home Depot HD, and I point out, ‘You own that.’ ”

In the excerpt below, Dahle told us more about the “20s fund” he created for his children.

Why Give Children an Early Inheritance?

Christine Benz: You’ve often talked about this idea of a “20s fund” for your kids. Can you talk about what that is, what type of account you would recommend for it, and what sorts of investments would go inside it?

Jim Dahle: Sure. The 20s fund idea came out of the fact that I was poor in my 20s. In college, I was literally donating plasma for grocery money, right? I mean, my parents had enough money to fly me home for Christmas and to fly me home for the summer, and they let me live at home for free while I was doing a summer job during my college years, but that was it. I was on my own for the rest.

Every March or so, I’d run out of money. The money I’d saved up from the summer before, and I’d need to get to the end of the school year without being too hungry. I didn’t like that. I missed out on a lot of opportunities in my 20s that I think would’ve been really cool, like owning a car, like maybe going to Europe, those sorts of things. The first time I ever really went outside the country in a significant way was after I graduated from medical school. I was 28 years old.

I just think the 20s are a pretty awesome decade, and if there was ever a time when you could use a little bit more money, even though you don’t yet have the capacity to earn it, it’s your 20s.

That’s one purpose of the 20s fund, so my kids don’t have that experience. They can do some of those things that you can only do in your 20s and have a little bit more of an enjoyable time than I had. But the other purpose of the 20s fund is that it is a little bit of an early inheritance. My kids stand to inherit substantially more money than what we give them when they head out the door in their 20s, and this lets us see how they manage it.

So far, we’ve been very pleased with what we’ve seen, but if they ended up being super spendthrifts, that would tell us when they do get their eventual inheritance, it needs to be in some sort of a spendthrift trust because they’ve shown they can’t handle a lump sum.

UTMA: Uniform Transfers to Minors Act

Dahle: The main fund we’re talking about here was a custodial account. This was a UTMA account, which they gained control of at 21. Literally, Vanguard called me up and said, “It’s time for this to be moved out of your account, so we’re moving it over to her account” when my child turned 21. Sure enough, the next day I had no visibility into this account anymore. It was her money. Wow. If she wanted to go spend it on whatever she wanted, she could do that. That’s the account that we use for it, a UTMA account.

So far, the children have shown that they’re being very, very responsible with that money. We’re pretty pleased about that. But that’s the idea behind a 20s fund is it’s just way more useful to inherit money in your 20s than it is at the age at which most people inherit money, which is around age 60. By age 60, if you’ve planned your financial life reasonably well, some big lump sum of money as an inheritance is not going to change your life at all.

How the ‘20s Fund’ Works in Practice

Amy Arnott: Can you talk a little bit more about how the 20s fund has worked in practice for your kids? Did they end up using that money for travel or other things that you sort of had in mind?

Dahle: The idea behind it was travel, a car, a wedding, a honeymoon, maybe if they needed some additional college money, a down payment on a house, a mission trip somewhere in Europe. Those are sort of the ideas behind this 20s fund, and every family is going to be a different size. Some people obviously can’t afford to do it at all. You’ve got to take care of yourself first before you can be giving money to the next generation.

But we basically just invested in index funds. I think half of it was in a total stock market index fund. The other half was in a total international stock market index fund, and we made contributions to it. Occasionally, they made contributions to it. They received an inheritance from a grandfather of a few thousand dollars. That went into that UTMA account as well. But we’ve always told them, “This is your money.”

We showed them the statements when they came in, and those quarters when they lost money, we pointed out that they had lost money. And when the quarters went really well, I showed them, “Look, this is what your money can do. It can make more money than you can make.”

We were able to teach lots of lessons along the way using that fund, but basically it’s now their money, right? They can withdraw it and transfer the money to their bank account and pay any capital gains taxes due on it. It’s their money that’s given to them when they turn 21, in essence.

So far, the only real use we’ve seen from it is that our oldest bought a used car with it. The rest of it’s just been sitting there growing, and I suspect most of them are going to get used mostly for a house down payment given the housing crisis these days.

Listen to the Full Episode

That’s just an excerpt from a recent episode of The Long View, but you can listen to the full conversation below (or read the transcript at this link). Dahle explored when tax strategies aren’t worth the trouble, the trade-offs of private investments, and what he learned about life and money after a climbing accident.