Help a Reader: Investing for Family

Here's an email I recently received from a reader:

We are the financial stewards/examples in our extended family.  We have until now purchased savings bonds for nieces/nephews and great nieces/nephews.  We chose not to have children. The amounts aren't much, say $100-$300 per year per relative, depending on life milestones.  This savings, hopefully investment, would be turned over for a major milestone, including, but not limited to college, such as purchasing a car, getting married, buying a house, or event. Realistically, each of these kids is unlikely to go to college. Some parameters:

• We just started this about four years ago so the accumulated savings bonds are not much. The parents of each child think this is a great idea because each one knows they are not going to save much for their kids.

• Three of the four are very young, so starting today going forward is fine.  The fourth has graduated grade school and has some accumulated bonds. 

• Minimum tax implications - Would prefer not to incur income taxes for us, nor trigger any tax filing requirements on the relative's part.

• Would like to provide a yearly statement to show the parents and recipient of the account the growth to teach the value of compounding (the savings bonds sure aren't impressive)

• We would like to put my name or my wife's name as co-owner on each account, depending on whose side of the family the relative is on (not a deal breaker requirement)

We are considering establishing $250 initial investment mutual funds for each individual focused on growth (not aggressive growth).  Also would consider a vehicle for S&P index fund if possible.  With low yearly contributions would need to avoid transaction fees. Since we don't want to limit it to college, I don't think education IRAs, Coverdells, or 529 plans are the best options. What would you do? Any suggestions would be greatly appreciated.

Wow, lots to consider. What would you suggest for him?

Comments

[Aaron]

I would go with a UTMA (Uniform Transfer to Minors Act) or UGMA (Uniform Gift to Minors Act), depending on which one your state allows. These are easy to set up at any brokerage like TDAmeritrade, Fidelity, etc and provide nearly everything you are asking for. When the minor reaches the age of maturity for their state, i.e., 18, 19, 21, it is then transferred into their name and they can do what they want with it. The only thing I am not sure of is the tax implications (it has been several years since I used my Series 7, 24 and 4).

[Thejester]

I think a DRIP plan would be an interesting way to set this up. Find a solid stock (are there any of those left?) provides a product or service that the kids are interested in. I believe many of the Divident ReInvestment Programs are low to no cost.

[Kevin]

Agree with Aaron, those accounts are likely to have lower minimums, which you need until the balances are built up over several years. And they wouldn't generate tax implications to you unless you since the accounts are really "owned" by the minor child. Unless of course, you're talking about giving over $12,000 per year which would have gift tax implications.

I don't think taxes will be a problem for the child at the level of money you're talking about. The kiddie tax doesn't kick in until he/she makes over $1,700 in investment income - which is probably more than some of the account balances.

[Paul Williams]

An UTMA or UGMA account would probably be best for this situation since they don't want to limit it to college.

There wouldn't be tax implications to you. If the child's unearned income exceeds $850 (from this account and any others), then there will be tax implications for the child. If the child's unearned income exceeds $1,700, then there will be tax implications for the child and the child's parents.

To avoid transaction fees, you'll need to go straight to the provider. I don't know which mutual fund provider has an S&P 500 index fund that will allow you to start with $250, but you may find one with some research. Vanguard probably won't work for this as their minimums are $3,000 for each account (unless you use the STAR fund, which is $1,000).

Good luck!

[bk]

I think the money would be better spent trying to get this kids to go to college. Why do you say they are unlikely to go, especially considering how young they are?

[Evan]

I do this type of planning on a daily basis, but with much larger numbers. However, I have to urge you not to go for the UTMAs/UGMAs. The BIGGEST downfall of these vehicles is that the child gets the money at 18/21 depending on your state. Another downfall is that UTMAs/UGMAs are part of the donor/decedent's estate.

Yet another downfall, the child is getting the money if one of the spouses' dies.

If you were talking about larger amounts, I would recommend a trust set up. There are other advanced set ups you can do...with life insurance where you would use a whole life policy (which will build up cash for the next 15 to 20 years) but one of the spouse's would be the owner of the policy so you could get at the cash if need be. There are plenty of other options depending how sophisticated you want to get.