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My nephew is about 7 months old. Aside from being a very happy little human, he will be the first in our family to have anyone invest money on his behalf before his first birthday.

The plan is to set up a custodial savings account in his name, seed it with deposits until there is enough money to open a custodial account at Vanguard where that seed money plus any future gifts / deposits will be used to purchase mutual funds.

On it's face it seems simple enough. However, I know there are things lurking in the shadows of which I'm not fully aware that need to be brought out into the light before I go opening accounts and funding my nephew's future dreams.

Broadly speaking (tax related and otherwise) what are the implications and responsibilities of my nephew having such an investment account. Will he have to file taxes? Can his custodial assets be used against him in any way in the future (scholarship / financial aid perhaps)? Will there be any burdens on his parents? Etc...

Thanks for the knowledge and letting me slide on this potentially misplaced topic.

-K
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http://www.fool.com/money/investingforkids/investingforkids0...

The link above is a start. We are considering 529 plans for the grandkids, but are not considering custodial accounts.
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Broadly speaking (tax related and otherwise) what are the implications and responsibilities of my nephew having such an investment account. Will he have to file taxes?

When the investments generate enough income, yes. Currently "enough" is about $900. Might be $950. The number changes from year to year, so that will be something that needs to be monitored.

Sales of stock will also generate a filing requirement if the proceeds plus other investment income exceeds that $950 amount.

Can his custodial assets be used against him in any way in the future (scholarship / financial aid perhaps)?

Absolutely. Much more of the student's assets are counted against him when determining financial aid than parent's assets.

Will there be any burdens on his parents? Etc...

The parents will be the ones who have to file his return. They'll need to provide information from their return to calculate his tax. And if there are siblings in his future who also have a generous uncle, the whole family's taxes become intertwined.

--Peter

PS - Your subject is perfectly ON topic here.
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Thanks for the reply.

Yes, that link has been bookmarked and visited for some time now.

529's were on the list for a while, but there's no guarantee that he will go to college nor do I think I want my gifts to him to be used for that. I'm the uncle... I'd rather him use it to travel the world, a much more enlightening experience if I do say so myself.
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Thanks for the info, Peter. Very helpful.

It has made me begin to wonder if I shouldn't create the account in my name, knowing that it is for him in the future? Hmmm....

-K
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It has made me begin to wonder if I shouldn't create the account in my name, knowing that it is for him in the future? Hmmm....

-K


A separate account in your name is not a bad idea. Since he is so young, there potentially will be others. If you place money in an account in his name, it is an irrevocable gift to him. Keeping it separate (and covered in your will) would allow it to be given at your discretion and split appropriately at the time.
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That article is way out of date which is why TMF need to put a date on them.
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It has made me begin to wonder if I shouldn't create the account in my name, knowing that it is for him in the future?

A separate account will probably make things easier for you, but I would not leave it to him via a will. I'd be more apt to just make him a beneficiary on the account so that it won't go through probate and he could get the money faster/more easily when you die.

If you plan to do this for all your nieces and nephews, separate accounts is probably the easiest so that you have an idea of how much you have set aside for each one.

This way, you also control the money and can actually decide later if you still want it to go to that child, or if you have a better need for it such as an emergency, it is available to you. If you put it in the child's name, it will be their money and you cannot take it back. It will count as their assets for financial aid calculations, where money in your name even with them as listed beneficiaries will not be counted because it does not belong to them.

I am not a fan of 529 plans at all. What happens if the child doesn't go to college or gets a full ride scholarship somewhere? I don't think they have enough flexibility, and I prefer managing the money myself.

If you do decide to give the money to the child via a UGMA/UTMA, then remember that you will be creating some work for the parents in terms of tracking and taxes.

Something else that I did not see mentioned and I would recommend is that when the child is older, please teach the child about investing. My kids had MCD stock by the time they were about 3, and they knew at that age that they owned a piece of MCD. It helps to buy stock that interests the child, and so things that are consumer stocks and are very visible tend to be good to investigate for a child. I think a financial education for the child will be a huge boon to them as they get older. I know it has worked very well with my children over the years, and I have talked about that a lot here on the various boards. Please consider this as a way to complete the gift.

As I think about it, I would suggest that you at least buy a little stock in the child's name just to teach them about finances, but you can keep the bulk of your gift in your own name for the reasons mentioned above. These are not mutually exclusive options.
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Thanks all for the opinions and knowledge.

2Gifts, great info and ideas. I think this is the route I will take.

I failed to mention that I am only 32 years old so leaving something in my will was not the aim. The aim was for my nephew and any future little ones to do and have just what was mentioned above and what I was never taught: why managing your money and making it work for you is so important. There is a desire for them to have the freedom at age 21 to do whatever they please to fulfill their dreams while understanding where and how that freedom has come about.

Thanks all!
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I am not a fan of 529 plans at all. What happens if the child doesn't go to college or gets a full ride scholarship somewhere?

I am a fan of 529's.

IMO if the child doesn't go to college, the money in the 529 goes to someone else (their sibling, their kids)
But I don't have a question of whether my kids (or my sibling's kids) go to college, but only a matter of where.

If the kid gets a full tuition scholarship, great! In that case, that undoubtedly means they are going to be attending full time - which means that room and board (at least what it costs for dorm room and dorm food) is also a qualified higher education expense and can be paid for by 529 without penalty.
If they get a scholarship/grants that covers tuition, books, room and board, then they are very very fortunate indeed. And in that unlikely case, the 529 money could be saved for a graduate degree or used for the sibling or cousin who wasn't able to get such a nice deal.

Worst-case, you take the money out and pay the 10% penalty.
But most likely there isn't a need to do that.
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Worst-case, you take the money out and pay the 10% penalty.
Hm - guess I have to take that back.
If scholarship is why you are doing a non-qualified withdrawal, you don't pay the 10% penalty.
http://www.savingforcollege.com/questions-answers/article.ph...
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I admit to not having read through every post in the thread. Keep in mind that for many things you will need the child's SSN. Even more important is an account is in any way in their name(custodial or whatever), there may be limitations and if there are tax implications, the parents need the information. They are responsible for an returns that may need to be filed.

Also, the age of majority for financial matters differs by state - http://www.finaid.org/savings/ageofmajority.phtml
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IMO if the child doesn't go to college, the money in the 529 goes to someone else (their sibling, their kids)
But I don't have a question of whether my kids (or my sibling's kids) go to college, but only a matter of where.


In your case, you seem fine with changing the beneficiary to someone else somewhere down the road. In my case, I have twins, and so both kids were going to school at the same time. It was only my intention to pay for my children's college, and never my intention to pay for any nieces or nephews. Even in the case of grandchildren, that would be so far down the road that I would still prefer to have my money available for other things and not tied up to only be used to pay for college.

Yes, I realize that I could take that money out at any time and pay that 10% penalty, but my preference is to not have to pay a penalty for the privilege of accessing my money for a different expense, plus I like the flexibility that I have by not having the money in something earmarked for college only.

I don't know what the OP thinks about using that money for other relatives, and it is good that you have pointed out that you can just change the beneficiary to another relative. For me, I don't consider myself responsible for paying anyone else's college expenses than my own children, and if the money is not used for that, I prefer to reallocate it to something else such as my retirement or the kids' weddings or helping them out with house downpayments or other large expense. I don't mind still using that money on them if that is what I choose to do at that time, but I don't like the inflexibility in only having the 529 for someone's education.

Something that has not been pointed out is that 529s can be tax-deductible in some states, and so that is also a consideration to be made. I don't live in one of those states, so that's as much as I know about that. Perhaps someone else can shed some light on the tax impact as a benefit.
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Thanks all for the replies.

Yes, I realize that I could take that money out at any time and pay that 10% penalty, but my preference is to not have to pay a penalty for the privilege of accessing my money for a different expense, plus I like the flexibility that I have by not having the money in something earmarked for college only.

I don't know what the OP thinks about using that money for other relatives, and it is good that you have pointed out that you can just change the beneficiary to another relative. For me, I don't consider myself responsible for paying anyone else's college expenses than my own children, and if the money is not used for that, I prefer to reallocate it to something else such as my retirement or the kids' weddings or helping them out with house down payments or other large expense.


This sums up my notions pretty succinctly. LIke I mentioned earlier, the money is a gift that would both educate and aid in the fulfilling of my nephew's (or his brothers' / sisters') future dreams, be that college, starting his own business, etc...

Also what I failed to mention, is that I'd like for any of my family members to contribute to this account as well. As children, my sister and I received bonds from our grandparents for our birthdays until we were 16. When these matured they were a nice gift. This is the same idea with the added bonus of more education and (hopefully) a better return.

As always, thanks for the knowledge.
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You know of state 529 plan I suppose. You can open one with relatively small amounts of money. We did this with $500 for two of our great grandchildren and $1000 for the other two. Our state is NC which has many opportunities and we use Vanguard funds that come in growth, moderate growth and "safe." Furthermore we get to deduct the money we donate from our income for NC taxes.

We didn't have 529 plans for the grandchildren but like you took out custodial accounts. As I recall at the age of 21, custodial accounts are given to the child. In the end, only one of the grandchildren used the money for college, two used the money for sports camps (they were athletes but neither ended up having a career in sports), and one just frittered it away (I think). All have large college loans in addition that they are paying off as well as they can. The granddaughter is unemployed at present.

brucedoe
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I recently setup a 529 for my 4 month old grandson and plan to use it for education expenses for him and any other grandchildren we have. I will adjust my monthly contribution in future years (up or down) depending on number of grandchildren and college expense inflation. The zero tax on 20+ years of gains was just to good to pass up.
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