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Along the same lines as a recent thread: I have a sister who is not nearly as well off as I, and is a single mother. I would like to give my niece some gifts of equity (in addition to toys!), but am unsure what the best way to go about it is. (My niece is 7 years old now.)

I am concerned that by giving stocks to her, I may screw up my sister's tax situation, and may also screw up financial aid once she gets to college age. I guess I could just keep the gifts in my name, but then maybe I'm missing some good tax deal?

Does anyone have any experience with this, and know which route is the best to take? I am talking on the order of low $100s, if that makes a difference. I would also like to be able to sell/buy the stocks if it seems prudent.

Thanks for the help!

--steve
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Steve,

Consider setting up an Educational IRA. There can be a maximum contribution of $500 total from all sources. This money will grow tax-free. Add more each subsequent year. I know it won't be a lot of money down the line, but it will at least grow tax-free.

GP
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Steve asks:

<<Along the same lines as a recent thread: I have a sister who is not nearly as well off as I, and is a single mother. I would like to give my niece some gifts of equity (in addition to toys!), but am unsure what the best way to go about it is. (My niece is 7 years old now.)

I am concerned that by giving stocks to her, I may screw up my sister's tax situation, and may also screw up financial aid once she gets to college age. I guess I could just keep the gifts in my name, but then maybe I'm missing some good tax deal?

Does anyone have any experience with this, and know which route is the best to take? I am talking on the order of low $100s, if that makes a difference. I would also like to be able to sell/buy the stocks if it seems prudent.>>


As GP points out, you may use an Education IRA for one approach. For details, see my discussion of the EIRA in our Foolish Retirement Plan Primer at http://www.fool.com/Retirement/Retirement.htm . You may also open a Uniform Gift to Minors account at a broker and put the stocks in the child's name. There are a couple of drawbacks to that. First, for college aid purposes she will be expected to use yearly some 35% of the value to pay her expenses. Second, someone will have to act as custodian of the account until she attains her majority. Those two reasons plus your desire to trade in her behalf indicate (at least IMHO) that you will probably want to retain the shares in your name. While legally not hers until gifted, they can always be earmarked in your mind for that purpose. One final thing: Keep good records because when she finally does get them she also gets your basis in those shares for tax purposes when she sells. Thus, she needs to know what you paid to calculate the taxes on any gains since your purchase.

Regards….Pixy
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I have given equity gifts to 2 of my friends' children, and decided to do "Uniform Gift/Transfer to Minor" accounts. That puts the stock in the child's name and Social Security number. Legally, a minor can't own/control stock, so there needs to be a trustee. After discussions with the parents, they were fine with me being the trustee for the account, so I can do the trading in it.

Advantages -- the capital gains and dividends are under the child's Social Security number, which means the parents do not pay the taxes on it (and neither do I. If it stays in my name, I have to pay). The child does not pay taxes on the first however much is earned (last I heard, it was $650, this could be wrong, but the amount in this account is earning way less than the minimum for now).

Disadvantages -- About one/third of the assets in this account will be expected to be used to pay for college when financial aid figures are calculated. Also, once the child turns 18, that money is his/hers -- you can't be guaranteed that it will be used toward college, or a down payment on a house someday, if (s)he decides to blow it on a spring break trip one year instead.

But I liked having the account in the kids' names, so when they get a little older, they see they have their account.

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A number of years ago my children each recieved inheritance in the form of Custodial Accounts... With me as the custodian. The investments have done fine, but I am concerned about the effect of these accounts on their scholarship eligability etc. as I seriously doubt that there will be enough to put them through college. I also am very much aware that at 18 the child can "take charge". I have occasional nightmares featuring the kids, fast cars and trips to Europe.

A better solution might be to set up some kind of trust, with funds ear-marked for college. Control could be passed at an age that you choose (25yoa sounds good) and you could add stipulations (if not used for college expences, 1/2 reverts to you etc.)
I'm not too sure how all this works, but I wanted to give you an alternative.

Personally, if I could legally convert the custodial accounts to some kind of trust, I would be more than happy to pay the difference in taxes.
Anybody have any ideas??

Ted
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>I have
> occasional nightmares featuring the kids, fast cars >and trips to Europe.

I can understand the fast car nightmare ... but I'll tell you, the one regret I have from my college years is that I didn't do a semester study abroad, or spend a summer traveling through Europe. If some of that money lets them have that experience, it's not the worst thing!

>Personally, if I could legally convert the custodial >accounts to some kind of trust,
> I would be more than happy to pay the difference in >taxes.
> Anybody have any ideas??

I'm no tax or legal expert, but based on the literature I've read, once the money is put in a Uniform Gift/Transfer to Minors account, it legally belongs to the child and you can't take it back. But perhaps there are ways I odn't know about.
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sharon000,
That too, is my understanding.
thanks
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