In the current era, children have a wide range of potential income sources before they even graduate high school. The popularity of young YouTube stars shows us that kids can become high-earning celebrities before they even know what to do with the money. Child actors are also a clear example of how a minor can quickly become a family’s highest earner. Other children might inherit vast sums of money long before they reach adulthood.
So what happens if parents divorce? Who gets access to this money? While the vast majority of financial disputes involve matters like child support and alimony, this could also prove to be a major point of contention in families across the United States.
What Happens When Children Become High Earners?
Putting divorce aside for a moment, it is important to understand what usually happens when children start to earn large amounts of money at a young age. There is legislation that protects a child’s earnings until they reach adulthood, including the famous California Child Actor’s Bill – better known as the “Coogan’s Act.” The bill is named after Jackie Coogan, an actor who had earned millions before he was 18.
Unfortunately, his mother and stepfather squandered his entire fortune before he was able to see a dime. Today, money earned by a minor remains their sole property. In addition, employers of a high-earning child performer must put 15% of their salary into a separate account that is closely guarded until they reach the age of 18.
Generally speaking, parents tend to set up a trust or an individual retirement account if their children have become high earners. A Roth individual retirement account is especially popular since it allows withdrawals for things like first-time home purchases or education.
Divorces Can Lead to Major Disputes
When parents of a high-earning child divorce, a fierce custody battle can ensue. In many situations, the person who controls the trust or the retirement account is the custodial parent. This means that parents try very hard to retain sole custody to maintain control over the child’s considerable finances. If one parent is no longer the primary parent, they may be removed from the trust or retirement account.
A great example of this was when the parents of Macaulay Culkin divorced in the late 90s. By this time, Culkin had already earned tens of millions of dollars thanks to successful film franchises like “Home Alone.” When his parents divorced, his multi-million-dollar fortune became a major point of contention. Culkin’s parents battled over custody, but they also both wanted control over his personal trust that contained his fortune. In the end, Culkin’s family accountant was put in control of the trust until Macaulay came of age.
It Depends What State You are in
Children often reach high levels of income thanks to their involvement in Hollywood. It is important to note that children only benefit from Coogan’s Law if they live in California. This certainly applies to a wide range of children in America who classify as “child stars.” With Coogan’s Law, disputes over a child’s fortune should not really apply to parents who are divorcing in California. No matter what, they are never going to get access to the funds earned by their children.
On the other hand, this law does not apply in virtually every other state. If kids make it big in another state, their income is classified as “family money.” Parents are free to do whatever they want with it. In this situation, parents might become engaged in bitter disputes over both custody and control of the fortune. However, this would be handled in virtually the same way as any other divorce involving child custody and high net worth property.
It is difficult to say which is the more common scenario today. Child stars continue to be in high demand within California, but there are also many children today who are gaining popularity and financial success through social media. Many of these children do not live in California, and they do not enjoy the protections of Coogan’s Law.