Investment for Children: How to Balance Growth, Taxes, and Control?

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Topic Author
R.E.G.P.
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Joined: Sat Feb 08, 2020 10:46 am
Location: California (northwestern)

Investment for Children: How to Balance Growth, Taxes, and Control?

Post by R.E.G.P. »

Hello,

My wife and I have received a gift of several thousand dollars for our two-year old. We already have a 529 and, as this gift is not specifically for education, do not want to lock it into a 529 tax-benefited educational use requirements. Ideally, we would like the following, in order of our priority:

1. Growth: We would like moderate to moderately aggressive growth over a period of at least 16 years (child currently 2 yrs old)
2. Taxes: We would like to keep taxes as low as possible for as long as possible.
3. Control: We would like to have custodial control of the investment PAST 18 or 21 yrs (depending on state law). Ideally, we would like to tell our child about this investment NOT before their third decade, i.e. until he/she is in their 30s.

Can we achieve a balance of all of these? If so, how would we do so?
Or, if we can't balance all of these, what would get us closest to our ideal balance, in order of our priority of (1), (2), (3)?
StealthRabbit
Posts: 528
Joined: Sat Jun 13, 2009 1:25 am

Re: Investment for Children: How to Balance Growth, Taxes, and Control?

Post by StealthRabbit »

You will want the gift in a UTMA, not a UGMA.
https://www.thebalance.com/beginners-gu ... ts-4060475

Eventually, you may want that asset in a Trust with specified distribution dates (may be able to do this outside of a trust, but when we were with 'dependent children' we set up our trust in such a way that distributions were timed up until age 40 (and to avoid gold-digger / 'mistake' spouse they may encounter).

For investments / taxable gains, you can use dividend efficient MF, but I would likely use ETFs

Another option is to reserve this gift until your kid has earned income, then put it in their Roth as allowed by income amounts. (IRA is Not attachable as student College Contribution by FAFSA).

When your child is old enough... engage them in Boglehead and financial activities for their future. We started ours in Roths at age 12 and they always helped in family businesses and budgeting / planning. They were financially independent by age 16, and paid 100% for cars / college / room and board... A bit intensive from some perspectives, but I had gained responsibility for a disabled parent the day I turned 18, so I wanted our kids a tad more prepared for financial decisions and activities of life. (just in case).
retired@50
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Re: Investment for Children: How to Balance Growth, Taxes, and Control?

Post by retired@50 »

R.E.G.P. wrote: Sat Feb 08, 2020 11:01 am Hello,

My wife and I have received a gift of several thousand dollars for our two-year old. We already have a 529 and, as this gift is not specifically for education, do not want to lock it into a 529 tax-benefited educational use requirements. Ideally, we would like the following, in order of our priority:

1. Growth: We would like moderate to moderately aggressive growth over a period of at least 16 years (child currently 2 yrs old)
2. Taxes: We would like to keep taxes as low as possible for as long as possible.
3. Control: We would like to have custodial control of the investment PAST 18 or 21 yrs (depending on state law). Ideally, we would like to tell our child about this investment NOT before their third decade, i.e. until he/she is in their 30s.

Can we achieve a balance of all of these? If so, how would we do so?
Or, if we can't balance all of these, what would get us closest to our ideal balance, in order of our priority of (1), (2), (3)?
I'd start here. https://www.bogleheads.org/wiki/Uniform ... Minors_Act

The desire to control beyond 18 or 21 will likely create issues for you to maneuver. A trust may be needed.

Regards,
This is one person's opinion. Nothing more.
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Wiggums
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Re: Investment for Children: How to Balance Growth, Taxes, and Control?

Post by Wiggums »

retired@50 wrote: Sat Feb 08, 2020 12:38 pm
I'd start here. https://www.bogleheads.org/wiki/Uniform ... Minors_Act

The desire to control beyond 18 or 21 will likely create issues for you to maneuver. A trust may be needed.

Regards,
+1

Control of money, gifted to your child, until he/she is age 30 is a tough requirement. You can do that with a trust, but that costs a lot of money to establish.

Is there a reason why you want control over an adult child? For example, special needs?
Topic Author
R.E.G.P.
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Joined: Sat Feb 08, 2020 10:46 am
Location: California (northwestern)

Re: Investment for Children: How to Balance Growth, Taxes, and Control?

Post by R.E.G.P. »

"Is there a reason why you want control over an adult child? For example, special needs?"

We don't want control over our child, but rather would prefer to keep the gift investment tucked away until an age we judge he/she has developed a knowledge of self and world, and a financial literacy, necessary for managing and spending an investment of larger value. For people of our demographic, we feel this is often, but not always, around age 30 or in the next years thereafter. In general, we do not feel that, for people of our demographic, an 18 or 21 yr. old person is typically ready for this responsibility or has the foresight required. There are exceptions, and perhaps our child will be one. Management of a smaller valued investment, of course, is an excellent way to learn. But for larger investments we are more circumspect.

To the other responses:

Are there hidden catches (taxes, costs) to, for example, set up UTMA or UGMA (UTMA recommendation noted) now, then transferring as much as possible into a Roth IRA after age 14 when/if our child begins to earn an income, and filing taxes with him/her as dependent until age 24 (if child meets IRS rules for dependent income, etc.)? Could this potentially be one way to extend custodial guardianship over a portion of the investment for up to 6 years (18 to 24)?
nolesrule
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Re: Investment for Children: How to Balance Growth, Taxes, and Control?

Post by nolesrule »

R.E.G.P. wrote: Sat Feb 08, 2020 3:01 pm
Are there hidden catches (taxes, costs) to, for example, set up UTMA or UGMA (UTMA recommendation noted) now, then transferring as much as possible into a Roth IRA after age 14 when/if our child begins to earn an income, and filing taxes with him/her as dependent until age 24 (if child meets IRS rules for dependent income, etc.)? Could this potentially be one way to extend custodial guardianship over a portion of the investment for up to 6 years (18 to 24)?
No. When the minor reaches the age of majority the custodial account, even a Roth IRA, would have to be turned over to the person. They can do whatever they wish with the Roth IRA regardless of who is filing their taxes.

Perhaps if you teach them good personal finance habits from a young age, it won't be an issue.
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