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Author: watergal Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75402  
Subject: Best strategy for gifting to late investors? Date: 11/21/2004 6:15 PM
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My parents are in their early 50's and have done very little investing.

For christmas, I'd like to give them a tangible gift in the form of some sort of investment vehicle that could be started with a few hundred dollars and added to occasionally as it is left to grow. It seems as if DRIPs are a good candidate. Is there anything else that I should consider?
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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43206 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/22/2004 6:24 AM
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Are you trying to encourage them to invest or expect that the investment will make a difference when they retire? I have some DRIP accounts so have no complaints with the idea of a DRIP.

It might be a better idea to buy them a book, pay for a session with a fee based planner or something else that emotionally helps them realize where they might end up in 10+ years if they stay on the same path.

BTW - If you are going to open an investment account for their benefit it might be better not to tell them about it and just manage it yourself. You can work on building it up at levels you are comfortable without needing to get their buy in. I sense you are expecting to help support them. If that is not correct and you really are trying to jump-start their efforts I would focus more on the education at this stage.

John

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43207 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/22/2004 7:16 AM
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If you are going to open an investment account for their benefit it might be better not to tell them about it and just manage it yourself.

This seems like a bad idea to me - there can be tax implications so just not telling them isn't something I'd recommend.

rad

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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43208 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/22/2004 8:45 AM
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Rad,

Depending on how the investments are handle there could be little tax implication that are not positive ones. You generally do not want to be passing money to the older generation when it comes to estate planning.

More importantly was the point I was trying (maybe badly) to make. It sounds like the parents are lacking in motivation and discipline to invest. If the child in the equation wants to take it on and expects to be funding they at some level anyway I would expect them to (a) do better, (b) want the control, and (c) not really care if their parents knew or not.

There is a moral hazard if you let someone else know that you have them covered. They feel less need to address their own risks as they know that is no longer their problem.



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Author: TaoRegency Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43212 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/22/2004 12:42 PM
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Dear Watergal...

Gee, your dilemma sounds familiar.

When IRA's first came out, I got all my siblings together and told them that what we needed to do was to open an IRA is their name and rather than buying gifts we would just make the initial contribution.

At that time my father had just retired from the military (where he had retirement benefits but was a long way off from retirement). As retired military with five kids he always said retiring was like being a newlywed couple with a complete family.

So, outside of his future benefits they had nothing saved.

I was really sure that I had hit upon the greatest gift ever.

Well, the reason they had nothing saved was because they did not know anything about investing.

Then, they were busy buying their first home and sending their kids through college...there were 5 of us and we were spread out over 15 years.

Anyway, my mom ended up cashing out the IRA about 7 years after it had been opened to give to my baby brother for college....

She regrets that decision today.

The point is you have a great idea. But, with what ever you do make sure the gift of knowledge goes with it. I would say something focussing on retirement living rather than just investing.

Your gift will only be important if they see the usefulness of it.

You can also start off with a T R Price mutual fund with nothing down and a mininum of $50 or $100 a month automatically. I am sure there are other fund families that have the same deal....

This way you get "professional" money management, and depending on the fund you choose better diversification than you do with Drips.

Lastly, you have to tell them, it is only fair, and as most parents, they love to brag about how smart their kids are to others....they just don't like it when their smart kids start telling them how to manage their lives.....

Good Luck!

Tao

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Author: Donna405 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43220 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/22/2004 7:06 PM
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If you plan to open an account in their names, the brokerage will require their SS numbers along with other pertinent information, i.e., heir to money after their death.

Donna

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Author: watergal Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43221 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/22/2004 9:00 PM
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Whew! I'm relieved that I'm not the only one in this situation. My parents have worked all their lives and haven't always made the best money decision, but it was not because the were living extravagantly...alas, the working poor.

So based on everything I've read it seems as if the best strategy is to help them open up a traditional IRA that invests in an index fund tracking the S&P 500 (or a mix with the total stock market fund [need to read more about this]).

If I were to open up a mutual fund in their name and contribute to it what would be the applicable tax rates? I've been trying to digest all of the info on the site but I'm still unclear about the overall tax implications of investing outside of a 401 k or IRA.

Thanks for the responses. I'll keep on digging. I'd apperciate any comments on the strategy I'm now considering.

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Author: watergal Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43222 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/22/2004 9:06 PM
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...and yes I agree, investing education will be essential.

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Author: pekinrobin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43223 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/22/2004 10:55 PM
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I would consider whether or not my parents would be offended by a "self improvement" gift.

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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43224 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/23/2004 2:33 AM
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If you are going to open an investment account for their benefit it might be better not to tell them about it and just manage it yourself. You can work on building it up at levels you are comfortable without needing to get their buy in.

If the account is registered in the parents' names, there could be tax impacts which could cause a lot of headaches if the parents aren't aware of any taxable events related to that account, such as dividends, capital gains distributions, or shares sold.

I know that I, for one, wouldn't want IRS entanglements caused by someone having an account registered in my SSN for my benefit but without my knowledge.

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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43225 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/23/2004 2:48 AM
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If I were to open up a mutual fund in their name and contribute to it what would be the applicable tax rates?

Long-term capital gains and qualified dividends are taxed at 15% if their marginal tax rates are higher than that.

Short-term capital gains, non-qualified stock dividends, bond dividends (except for dividends from municipal bonds), interest would be taxed at their marginal tax rates.

Seriously, though, many parents don't want to disclose their tax situation to their children. Also, gifted investments (which is what I think you would end up talking about) may be of limited value if the parents don't have some basic knowledge about investing.

I think I would suggest financial and investment knowledge before actual investments. Depending on the parents, this might be done by making one or more books available and presenting them as something like, "I learned a lot from this book. I thought you might like to read it." But this is where adult children have to be careful because it is hard for parents to accept instruction, especially unsolicited "help", from their children. Even without the automatic reflex of thinking of their children as their babies, people are usually unreceptive to being pushed in a direction until they are ready to receive information. It's like the saying, "You can lead a horse to water, but you can't make him drink," but amended with "but you can salt the oats."

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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43226 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/23/2004 10:33 AM
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I know that I, for one, wouldn't want IRS entanglements caused by someone having an account registered in my SSN for my benefit but without my knowledge.

1. You can get a separate tax ID for a trust or similar.

2. Tell them but make it clear that they have no control. As they have no investments at this stage some slight extra tax from investment income might be viewed as a sign of success.

Mostly I was indicating that the parents' lack of ability to invest for themselves removes their ability to get a vote. The alternative is for the child to cut them lose and watch them sink safe in the knowledge that their parents never paid any income on investment income.

The tax impact really is the tail waging the dog in this discussion. Why are people so concerned about the slight income difference vs. the fact that someone's parents are heading to retirement with no assets to retire on AND the child thinks they need to do something to help. Which is the greater evil here?

John

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Author: IndecisiveFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43227 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/23/2004 10:43 AM
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The tax impact really is the tail waging the dog in this discussion. Why are people so concerned about the slight income difference vs. the fact that someone's parents are heading to retirement with no assets to retire on AND the child thinks they need to do something to help. Which is the greater evil here?

I think the greater evil is the slight income difference. An IRS audit is potentially more harmful than just telling the parents that you will help them.

IF

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43228 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/23/2004 11:56 AM
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I think the greater evil is the slight income difference. An IRS audit is potentially more harmful than just telling the parents that you will help them.

I agree. I don't think you screw with other peoples' taxes - parent or anyone else. I'm also not fond of trying to fix other people. Would you give them advice on how to improve their sex lives if you didn't think they did that up to your standards ?

rad


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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43240 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/23/2004 1:42 PM
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I think the greater evil is the slight income difference. An IRS audit is potentially more harmful than just telling the parents that you will help them.


Focus...

As I noted you can declare all the income, meet all the IRS rules and have absolutely no issues. Multiple ways to deal with this.

Lets assume that you hid the investments from the parents. You can still mail in the taxes due.

An audit will show that the bills are paid. Maybe a surprise that there was an audit but most audits are that way.

Stop assuming there is a tax issue and focus on the issue of lack of investments. Focus on the fact that there would not be much income initially as most investments throw off small amounts of income when you are trying to grow the investment rather then produce income.

Debate the merits of parents with no investments. Pay your taxes and sleep well knowing the IRS does not want to waste its time on small account that are fully paid up.

John

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43245 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/23/2004 3:19 PM
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1. You can get a separate tax ID for a trust or similar.


I did not see where the OP said this would be in a trust, but for it to be in a trust that would have a separate tax ID, then it has to be an irrevokable trust. That will cost the OP significant dollars to have an attorney set up, and the taxes that an irrevokable trust pay are higher than the taxes that an individual pays, so I am not sure that this option helps in this case.

2. Tell them but make it clear that they have no control. As they have no investments at this stage some slight extra tax from investment income might be viewed as a sign of success.


I don't understand this one. If the OP puts the account in the parents' names, then the money already belongs to them, and it is the OP who has no control over the account. Once it belongs to the parents, they have all the control and can do what they want with this account including cashing it out.

I agree with other folks who have said that education needs to also be provided to the parents.

There might also be another way for the OP to provide for the parents. The OP could keep the money in the OP's name, and either give it to the parents when they need it or make the parents the beneficiaries of the account if the OP pre-deceases them.

I'm not convinced, tbough, that the result which is desired is the one which will be achieved.

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Author: IndecisiveFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43254 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/23/2004 5:02 PM
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Stop assuming there is a tax issue and focus on the issue of lack of investments. Focus on the fact that there would not be much income initially as most investments throw off small amounts of income when you are trying to grow the investment rather then produce income.

The orginal issue was finding an investment vehicle for the parents. A side issue developed from another poster about telling the parents. We are arguing this point, not the invest vehicle part. Some of us are of the opinion that you should make the parents aware of your activities. You are fighting against that idea even though the OP never mentioned it as a concern.

IF


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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43265 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/25/2004 11:07 AM
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A side issue developed from another poster about telling the parents.

Independent of who is taking what position I think the message that we are off topic is 'spot on'.

What are the proposed investment vehicles that make sense given the time horizon and the other attributes?

John

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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43305 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/27/2004 12:57 AM
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1. You can get a separate tax ID for a trust or similar.

This is the first time anyone mentioned a trust or similar. Yes, with the tax impacts going against a trust, the situation is completely different from having hidden tax impact to the parents.


The tax impact really is the tail waging the dog in this discussion.

No, the potential for conviction of tax fraud was the problem.

Why are people so concerned about the slight income difference vs. the fact that someone's parents are heading to retirement with no assets to retire on AND the child thinks they need to do something to help.

As originally described, it would have been a very serious IRS entanglement with potential for the parents being audited and having to defend against tax fraud.

Gifting more than $11,000/yr between individuals can also result in "gift tax" issues (the excess counts against one's estate tax allowance, and when that is consumed it has tax impacts for the tax year in which the funds are gifted).

In any case, it does no good to gift investments directly to the parents until the parents are reasonably thrifty and have some knowledge for managing the investments.

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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43306 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/27/2004 1:03 AM
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Lets assume that you hid the investments from the parents. You can still mail in the taxes due.

And just how are you going to know what taxes are due without:

1. acquiring the parents' 1040 without their permission?
2. filing a 1040x without forging the parents' signatures?

A trust, which you mentioned in another message, may be a better choice since, even though the trust would likely pay more taxes, it would keep one from having to meddle with the parents' taxes.

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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 43307 of 75402
Subject: Re: Best strategy for gifting to late investors? Date: 11/27/2004 7:35 AM
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In any case, it does no good to gift investments directly to the parents until the parents are reasonably thrifty and have some knowledge for managing the investments.

My point exactly. Thanks for saying it without the red herring issue of taxes.

Side note: tax fraud does not occur when the taxes are paid even if the person did not know they taxes were paid. The IRS does not care who paid them the money, just that it was paid. Even if you estimate badly and over pay they are fine. Under reporting and underpaying are different.

John

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