Where to put money gifted to infant son?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
abonder
Posts: 268
Joined: Sat Nov 03, 2012 10:52 am

Where to put money gifted to infant son?

Post by abonder »

Hi,

I was hoping to get some feedback about how to manage a gift to my infant son from his grandparents. He was given a check (significant amount but well under the annual gift exclusion) by my in-laws "for his education." I mentioned the possibility of having my in-laws open a 529 in their name with my son as the beneficiary but they didn't seem interested. My wife and I both have 529 plans started with our son as the beneficiary. At the current time, we can afford to make annual contributions.

I have read a little about UTMA/UGMA accounts but I am not sure if that is the best route? Some people on this board have cited the limited tax benefits and the requirement to file taxes annually for the minor as disadvantages to the the use of these accounts. The money belongs to my son, not us (his parents), so I have no problem with it being his when he turns 18. If UTMA/UGMA is not worth the hassle, would I just open an investing account in his name and invest the money in a low-cost, indexed, boglehead-style portfolio? I am not even sure how I would go about depositing the check as it's made out to my son and he doesn't have a checking or savings account!

Thank you in advance for the insights. I am open to any suggestion and will try to check back regularly to answer any questions that could arise.

Thanks!
jstrazzere
Posts: 260
Joined: Tue Feb 18, 2014 3:19 pm

Re: Where to put money gifted to infant son?

Post by jstrazzere »

Why don't you have the check torn up, re-written to you, and ultimately deposited into your 529 Plan?
That would seem to help your son, and also satisfy your in-laws wishes.
FreemanB
Posts: 374
Joined: Thu May 22, 2014 5:55 am

Re: Where to put money gifted to infant son?

Post by FreemanB »

Since they said the money was for his education, is there some reason you don't want to add the money to one of the 529 accounts? Yes, it would mean that technically you have control of the money, but it doesn't sound like the grandparents were overly concerned about how it was handled. As for having the check made out to him, you can ask your local bank for their particular policy, but usually you are allowed to sign for a minor child(And include your name) and deposit it like any other check.

If you want to keep the money completely separate from the 529 plans, then you may want to start by opening a simple savings account. We have one for our daughter at a local credit union and use it for smaller gifts, counting/depositing coins from her piggy bank, etc. It isn't intended to be any serious savings though, more of an eventual tool to start teaching her about money and banking in general. All of the larger monetary gifts go straight into her 529 plan.(And we make this clear to anyone giving money)
itstoomuch
Posts: 5343
Joined: Mon Dec 15, 2014 11:17 am
Location: midValley OR

Re: Where to put money gifted to infant son?

Post by itstoomuch »

I think you I'll have to run the numbers for UGMA vs 529.
When it comes to MONEY, I take no one's advice until I personally vet the numbers. :oops:

Disclaimer: We did UGMA. The 529 wasn't around for us.
If and when we have GCs, I'd still do UGMA, initially followed by 529. UGMA because it's more flexible and more tax advantages over 529s.
GL :oops:
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
User avatar
lthenderson
Posts: 8525
Joined: Tue Feb 21, 2012 11:43 am
Location: Iowa

Re: Where to put money gifted to infant son?

Post by lthenderson »

abonder wrote:I am not even sure how I would go about depositing the check as it's made out to my son and he doesn't have a checking or savings account!
As long as your son is a minor, you can cash his check into any of your accounts you please. Some banks may require you do so in person with a birth certificate showing that you are his parent. I have my kids listed with my bank account so I don't need this step and can do electronic deposit. I do this all the time for my kids and then write the check to deposit funds into their 529's or other accounts.
gotlucky
Posts: 188
Joined: Mon Jul 16, 2012 2:44 pm

Re: Where to put money gifted to infant son?

Post by gotlucky »

Your situation will probably be different than mine.

We aren't going to be eligible for financial aid, so I like UTMAs. When the grandparents gift money to my kids, I transfer the equivalent amount of highly appreciated stock from my portfolio and sell it in their accounts. The kiddie tax allows them up to $2100 of long-term gains federally tax-free. This is stock that has become too big a part of my portfolio that I've wanted to sell anyway but didn't want to pay the tax on the gain. I could also donate this stock to my donor advised fund.

I've been doing this for a few years and built a decent sum. Some years, the gain on their positions exceeds $2k, so I sell and reset the basis tax-free. I pay for my kids' discretionary expenses out of these accounts. Camps, sports activities, and, in the future, cars, phones/computers, and orthodontics. My plan is to deplete these accounts by they time they are 18 just in case 1) they turn out to be spendthrifts and 2) we could potentially be eligible to receive financial aid. I hope neither turns out to be true.

I like the fact that the UTMA account is in their name as it has provided an unanticipated educational benefit. I think the grandparents thought I was pocketing the money for many years. So I was able to feel smug when the kids showed the grandparents their UTMA brokerage statements with significantly more money than they were gifted. Come to think of it, the gifts have probably gotten larger since then.

I'm not a big fan of 529 plans since my state offers no deduction for contribution and I don't like the high-fee investment choices. I prefer to invest through taxable accounts where I can tax-loss harvest now, tax-gain harvest when we retire early or defer the gains into perpetuity. I do like Coverdells but the $2k/yr contribution limit makes them not very appealing to many. If the grandparents were only gifting this amount and I didn't have unrealized capital gains, I'd probably have them set these up instead of 529 plans.
Pathologyguy
Posts: 25
Joined: Sat Jan 31, 2015 8:44 am

Re: Where to put money gifted to infant son?

Post by Pathologyguy »

Agree with itstoomuch that there is no single answer for UGMA versus 529 without some underlying modeling/assumptions, including your marginal tax bracket, amount invested, and future financial aid plans.

You could open up a taxable account in your own name to manage the money for your son, retaining control (and full tax liability) for it. That would be very simple but would provide no tax sheltering. The impact of tax sheltering depends on your marginal tax bracket and the returns on investment, but should not be underestimated for an account that is not likely to be used until college.

Opening a taxable account in your son's name is basically UGMA/UTMA, to my understanding. You can currently avoid filing taxes up until the point your child's investment income exceeds $1000 annually. Note that UGMA/UTMA accounts are more flexible but currently count as student assets for financial aid, meaning that they contribute at a very high proportional rate to the expected family contribution. They also have a limited amount of tax protected space compared to 529s.

529s do have more limitations on distribution but have more tax protected space and simpler management for growing account balances (no tax filing). Parent owned 529s count as parental assets, which currently contribute at a much lower proportional rate to the expected family contribution. Note that having grandparents own 529s may have unexpected negative consequences on financial aid as distributions from these are considered income to the child.

Without a more sophisticated analysis, I think that the suggestion already mentioned of rolling the gift into the existing parent-owned 529 is both simple and commensurate with the expressed grandparental wishes.
Topic Author
abonder
Posts: 268
Joined: Sat Nov 03, 2012 10:52 am

Re: Where to put money gifted to infant son?

Post by abonder »

First of all, thanks so much for all of the advice. I just typed a really long reply and then had my browser crash and erase the message! The input has been helpful in reaffirming my impressions and providing some new insights.

Pathologyguy- I also thought that a taxable account in my son's name would be effectively a UTMA/UGMA account (presumably because a minor needs a custodian for his/her account). Is there anyone who can verify this for sure? If I wanted to setup an account for him at Vanguard, would I be able to deposit the check in his name directly into the account?

Itstoomuch/gotlucky/FreemanB - I appreciate that you all emphasized the need to "run the numbers." We are able to contribute the annual gift exclusion in each parent's 529 right now. We hope to be able to do this annually but that could change. Thus, I feel like we wouldn't "need" the gift from grandparent's to pursue our plan of funding the 529. I anticipate that we will not be eligible for need-based financial aid, at least if both of us are still working full-time when the little one goes to college. We do not enjoy a deduction on state taxes for our 529 contribution, but we still felt it offered enough advantages for use to utilize it.

I am leaning towards opening a UTMA/UGMA account for my son and continuing our plan to fund the 529 as we can. Then we could use the UTMA money for educational costs if the 529 funds don't cover it. Since the money really belongs to my son, I don't have any objection to it becoming his at age 18. Hopefully we will have imparted enough teaching for him to use it responsibly at that point.

Thanks again for all of the insights. I look forward to additional feedback and am always appreciative of criticism and advice.

Thanks.
BanditKing
Posts: 631
Joined: Tue Oct 29, 2013 11:11 pm

Re: Where to put money gifted to infant son?

Post by BanditKing »

Are you maxing the 529 contribution for the year? If not, why not use it to finish capping it off. If your state allows a 529 deduction, that could also be a help.
User avatar
bru
Posts: 1013
Joined: Fri Jul 23, 2010 6:32 pm

Re: Where to put money gifted to infant son?

Post by bru »

abonder wrote: Pathologyguy- I also thought that a taxable account in my son's name would be effectively a UTMA/UGMA account (presumably because a minor needs a custodian for his/her account). Is there anyone who can verify this for sure? If I wanted to setup an account for him at Vanguard, would I be able to deposit the check in his name directly into the account?
I've been looking in to this and yes it seems a taxable account in a minor's name, with the parent as the custodian, would be a UTMA/UGMA account at Vanguard.
lthenderson wrote: As long as your son is a minor, you can cash his check into any of your accounts you please. Some banks may require you do so in person with a birth certificate showing that you are his parent. I have my kids listed with my bank account so I don't need this step and can do electronic deposit. I do this all the time for my kids and then write the check to deposit funds into their 529's or other accounts.
You were able to add your kids to an existing account? My bank said no (it may have been because of the type of account) so we had to open a new account for my son with one parent listed as the representative payee.
Tanelorn
Posts: 2370
Joined: Thu May 01, 2014 9:35 pm

Re: Where to put money gifted to infant son?

Post by Tanelorn »

ESAs are limited to $2k/year but are much more flexible than 529s. You can do them in addition.
User avatar
AAA
Posts: 1885
Joined: Sat Jan 12, 2008 7:56 am

Re: Where to put money gifted to infant son?

Post by AAA »

abonder wrote:The money belongs to my son, not us (his parents), so I have no problem with it being his when he turns 18.
In my state, the age of majority is 21 not 18. Just wanted to make sure you knew that it is different for different states, and not always 18.

Our kids had a UGMA account that we transferred to a 529 as a UGMA account. When they reached 21, the account converted to a regular 529 in their name.
Lafder
Posts: 4127
Joined: Sat Aug 03, 2013 7:56 pm
Location: East of the Rio Grande

Re: Where to put money gifted to infant son?

Post by Lafder »

I would add to the 529, or invest in my own name.

All of your savings in your own name can be used for your children's education.

My opinion is that it is better to to have money in your child's name for a number of reasons including calculating financial aid, and not giving an irresponsible young adult $$ to blow (hopefully your child will not end up being a person who will do that, but it is too early to know).

Best wishes,
lafder
User avatar
lthenderson
Posts: 8525
Joined: Tue Feb 21, 2012 11:43 am
Location: Iowa

Re: Where to put money gifted to infant son?

Post by lthenderson »

bru wrote:
lthenderson wrote: As long as your son is a minor, you can cash his check into any of your accounts you please. Some banks may require you do so in person with a birth certificate showing that you are his parent. I have my kids listed with my bank account so I don't need this step and can do electronic deposit. I do this all the time for my kids and then write the check to deposit funds into their 529's or other accounts.
You were able to add your kids to an existing account? My bank said no (it may have been because of the type of account) so we had to open a new account for my son with one parent listed as the representative payee.
Whenever my kids get any kind of money for birthdays, gifts, etc, because they are minors I endorse it, deposit into my checking account and then transfer it to accounts that I set up for them. I think the first time I had to go to the bank in person to show them a birth certificate and they just made a note in their system that I am the legal parent and they are minor. Now I use electronic deposit with my phone so I don't have to make a trip to the bank at all. I bank at Wells Fargo.
Grt2bOutdoors
Posts: 25625
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Where to put money gifted to infant son?

Post by Grt2bOutdoors »

abonder wrote:First of all, thanks so much for all of the advice. I just typed a really long reply and then had my browser crash and erase the message! The input has been helpful in reaffirming my impressions and providing some new insights.

I am leaning towards opening a UTMA/UGMA account for my son and continuing our plan to fund the 529 as we can. Then we could use the UTMA money for educational costs if the 529 funds don't cover it. Since the money really belongs to my son, I don't have any objection to it becoming his at age 18. Hopefully we will have imparted enough teaching for him to use it responsibly at that point.

Thanks again for all of the insights. I look forward to additional feedback and am always appreciative of criticism and advice.

Thanks.
Monies given to minors for their benefit should be in a UTMA account - years ago they used UGMA but I believe that titling has become obsolete by the use of the word "transfer - meaning a complete and irrevocable movement of monies from an adult to a minor". The UTMA offers flexibility, use of monies is not restricted to higher education. The monies will go to the child at the age of majority as dictated by your states laws, in my state it's 21. I use a UTMA along with 529 plan - if you "train" your child when they are able to comprehend and understand that the account is to be used for college, you usually side-step the reckless spending behavior (usually!) that folks worry about here. Monies that have been given to my child over the years for birthdays and holidays goes right into the UTMA account - the money is theirs, not mine and I have zero intention of spoiling the spirit in which it was given. You don't have to file an annual tax return unless the unearned income the child receives exceeds the $2,100 threshold set for tax year 2015. That said, a little planning on your part in filing annually will increase your child's cost basis in the funds meaning their ultimate tax liability will be greatly lessened or eliminated when they go to withdraw from it. For example, if you purchased savings bonds you could declare the annual interest earned and accrued but not redeemed on the tax form, if you receive mutual fund dividends you could also declare that annually - those actions increase the cost basis, thereby reducing the taxable gains. It adds up if you do it from year 0 to year 18 or year 21. Consider that the one gift from the IRS, but the gifts stop after the kid gets the account transferred legally into their names. Good Luck.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
hkcj
Posts: 151
Joined: Wed Dec 21, 2016 1:53 pm

Re: Where to put money gifted to infant son?

Post by hkcj »

gotlucky wrote: Tue Feb 10, 2015 3:24 pm We aren't going to be eligible for financial aid, so I like UTMAs. When the grandparents gift money to my kids, I transfer the equivalent amount of highly appreciated stock from my portfolio and sell it in their accounts.
I like this plan, but are there any risks to transferring your own shares when you received a dollar check? I don't want to oversave in a 529, and I like the flexibility of having some money to pay for activities, K-12 materials / computers, etc.

(Old thread, I know!)
Pops1860
Moderator
Posts: 1831
Joined: Thu Mar 14, 2013 4:05 pm

Re: Where to put money gifted to infant son?

Post by Pops1860 »

As noted by hkcj, this is an old thread, but new post is relevant.

Moderator Pops1860
The power of accurate observation is often called cynicism by those who do not have it. ~George Bernard Shaw
Post Reply