Any suggestions on how to correct this situation

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aggie91
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Any suggestions on how to correct this situation

Post by aggie91 »

We have two sons, ages 11 and 8. When each son was born, we gave them appx. $10,000 in stocks (transferred from our taxable account to their individual custodial accounts). We have not made any new purchases in their accounts (other than dividend reinvestment). I don't know why we didn't foresee this problem, but we gave each son different stocks (instead of just giving them equal shares of the same companies). So, now we have one son whose account value is more than twice as much as the other son because some stocks have significantly outperformed others. My original plan was to just make their accounts "even" when we finally gave them control of the assets by contributing the difference to the account with the lower balance. The difference now appx. $35k; who knows what it will be in 7-10 years.

Does anyone have any idea of how we can make their accounts "even"? We do not want to sell any of their positions. I'm wondering if it is possible for each son to "give" half of his portfolio to his brother, the effect being that their portfolios would mirror each other. We would have to do this over the course of a couple years so we'd be under the gift tax limitations.

Both sons also have sizable 529s and both sons are beneficiaries of my husband's Post-9/11 GI Bill benefit (we were able to split the benefit 50/50, so each son has half of his college expenses covered). The assets described above will not be needed for college expenses. Our goal is to have a small nest egg to give them when they are adults.

We are fortunate to have this problem, but we need to do something to correct it. Thank you for your replies.
sscritic
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Re: Any suggestions on how to correct this situation

Post by sscritic »

I am a stickler on these issues. My daughter got $9000 indirectly from my grandfather when she was 3. He was dead before my son was born. We gave money to my son to get him started. When he was about 13, we gave him more so he could catch up. I would suggest that you not use one child's money to make up for your mistake. Give the son behind more money to start the catch up process.

In the end, you can't make them even. After we gave my son his catch up money, my wife died. My son got social security payments for four years; my daughter was over 18 and got nothing. The one behind ended up far ahead. It wasn't equal, it wasn't fair, but it was what it was. If you give money to each until they reach 18, you will have three extra years to give money to the 8 year old. (You didn't tell us who is ahead; if it is your 8 year old, that's what it is.)

The other thing you can do is give the "behind" one more support for college. I bought my daughter a car; my son bought his own from his money saved from social security.

Perhaps the market will collapse for the investments of the son who is ahead and you won't have to do anything. :)
sscritic
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Post by sscritic »

Follow up:

How do you make an 8 year old and an 11 year old equal?

The same amount in their accounts when each reaches age 18? (assume your state law turns the money over to them at 18) These dates are three years apart.

The same amount in their accounts when the first reaches 18 and the other is 15?

The same amount in their accounts at age 18, adjusted for inflation over the three years between when the first reaches 18 and the second reaches 18?

Even if they each had the same stocks, they wouldn't be equal under the first or third definitions above. I am not sure why you would want to use the second definition, as a 15 year old is nothing like an 18 year old.
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bottlecap
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Post by bottlecap »

Did you tell them? If not, I would scrap the whole system. It is your money anyway. The fact that you've made a mental accounting (of sorts) is of no consequence. Divide it up as you see fit. You've paid taxes on it all along, not them.

On the other hand, if you told them about it, you may have to make the difference up to the other child.

Or, you could scrap the system and use it as a learning opportunity. Tell them you invested equal amounts when they were born, but instead of investing in similar index funds, you picked different stocks. Because of undiversified risks, one account did better than the other. Through no fault of his own, one child got lucky, the other not so much. Tell them you will treat them as one portfolio, so each of them were subject to the same risk. Perhaps say child 1 will get $x at eighteen and child two will get the same at 18, even if you have to make it up. Adjust for inflation if you must. The lesson: Don't take undiversifiable risks when investing. You're just gambling.

You can figure this out, but keep in mind that ultimately, this was never their money and the decision is yours.

Good luck,

JT
sscritic
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Post by sscritic »

bottlecap wrote:Did you tell them? If not, I would scrap the whole system. It is your money anyway. The fact that you've made a mental accounting (of sorts) is of no consequence. Divide it up as you see fit. You've paid taxes on it all along, not them.
They opened custodial accounts (UTMA?). It is no longer their money, it is their sons' money. They are only the custodians and have a legal obligation to protect the assets of each son individually. Taking $17,000 from one son to give to the other doesn't pass muster by this criteria. And the parents shouldn't have been paying taxes, the sons should have paid their own taxes. Even if the taxes are reported on the parent's return, the obligation is the sons'. If the parents paid the taxes for the sons, that was a gift from the parents to the sons. [I said I was a stickler; that's how I treated my children's UGMA accounts. My daughter does my granddaughters' returns, and she knows the difference between her own money and my granddaughters' money.]
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SpringMan
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Post by SpringMan »

sscritic wrote:
bottlecap wrote:Did you tell them? If not, I would scrap the whole system. It is your money anyway. The fact that you've made a mental accounting (of sorts) is of no consequence. Divide it up as you see fit. You've paid taxes on it all along, not them.
They opened custodial accounts (UTMA?). It is no longer their money, it is their sons' money. They are only the custodians and have a legal obligation to protect the assets of each son individually. Taking $17,000 from one son to give to the other doesn't pass muster by this criteria. And the parents shouldn't have been paying taxes, the sons should have paid their own taxes. Even if the taxes are reported on the parent's return, the obligation is the sons'. If the parents paid the taxes for the sons, that was a gift from the parents to the sons. [I said I was a stickler; that's how I treated my children's UGMA accounts. My daughter does my granddaughters' returns, and she knows the difference between her own money and my granddaughters' money.]
I agree. The income generated by that amount, assuming the kids had no other income would not likely result in any tax obligation in the kid's tax bracket. I had UGMA accounts for both my kids but invested in exactly the same mutual funds and equal shares of DTE stock for each kid. The accounts still had different dollar values when cashed in for their college education as they were 3 years apart in age.
Best Wishes, SpringMan
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aggie91
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Post by aggie91 »

Thanks for the replies. The accounts are UTMAs, the assets belong to the boys individually and we (the parents) are the custodians until they are 18. They don't know about these accounts; they are more concerned with playing baseball and playing with Legos.

I had in mind when we did this many years ago that when my oldest son turned 18, I'd show him his account, teach him the best I could, and let him take it from there. Just say he had $50K, then I planned to make sure my youngest son had appx. the same amount in his account when he turned 18. That was the plan. Now, I'm 11 years older and wiser...if I could have done things differently, I would have. Hindsight is 20/20. Now the situation is that my younger son has the account with the higher value. Who knows what the situation will be in the future, but --as a mom--it just doesn't seem right that one child would potentially get $X and the other son would receive $X+$35,000. I made the mistake and I will take responsibility for figuring out how to deal with the situation.
sscritic
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Post by sscritic »

aggie91 wrote:Thanks for the replies. The accounts are UTMAs, the assets belong to the boys individually and we (the parents) are the custodians until they are 18. They don't know about these accounts; they are more concerned with playing baseball and playing with Legos.

I had in mind when we did this many years ago that when my oldest son turned 18, I'd show him his account, teach him the best I could, and let him take it from there.
This another aspect where I differ with many. When my daughter got the $9000 (three gifts of $3000 - the limit at the time to avoid filing a gift tax return), I purchased several individual stocks. We lived in Pittsburgh at the time, and I bought PPG Industries (among others) for her. I am sure that I told her about her account by the time she was five. She also knew to root for the Steelers. (Your children can learn about money and sports at the same time.)

I told her that the money was for her to use for college. I don't think you want to wait until your children are 18 to teach them about money. If you teach them about saving and charity, why wouldn't you teach them about investing at the same time? I also did my childrens' tax returns in front of them (or at least showed the returns to them and went over the various entries) starting at about 15. You don't want the idea of taxes to be a surprise at 18. At 18, they started doing their own taxes; they had lots of questions and I helped them, but they were responsible for their own returns.

I am not a big fan of secrets. When their mother got cancer, we hid nothing (we sometimes delayed the bad news for a day until we could digest it ourselves). We didn't want our children not to trust us (there are lies of omission as well as lies of commission.)

Everything has to be age appropriate, but for most things that comes long before 18. You didn't teach your children to swim by throwing them into the deep end of the pool, why would you teach them investing that way? (I know that probably isn't your intent, but the words "when my oldest son turned 18, I'd show him his account, teach him the best I could, and let him take it from there" imply that all the education will occur after he has control of the account.)
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aggie91
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Post by aggie91 »

sscritic, thanks again for your replies. I continue to learn from those with more experience than me.

Just to clarify, when I said "I'd show him account and teach him the best I could...", I was not clear in my statement. Believe me when I say my kids know more about personal finance/investing than most adults. They have been taught from a young age age-appropriate fundamentals. Budgeting/saving/investing. I volunteer to teach an 'Economics for Kids' class at their elementary school. They earn money by doing chores, they make their own spending decisions for 'fun' items, they give to charities and volunteer. They know that we are not in debt (except our home) and we don't buy something unless we can pay for it. They were with me when I recently refinanced our home to our new 15 year/4.5% loan and I did my best to explain them why this new interest rate/term was making me so happy. They are well aware of the 529 accounts, they see me making deposits into those accounts, and they know that gifts from their grandmother are deposited into those accounts. They know about the basics of taxes, as they watch me each year preparing for our filings.

The custodial accounts are not a "secret", per se. But, they don't manage them and I don't see a reason why they should be concerned with the account values at this age in their lives. I'd rather them be kids while they are kids and worry about kid-stuff.

Again, thanks for your replies. Best to you.
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bottlecap
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Post by bottlecap »

aggie91 wrote:Thanks for the replies. The accounts are UTMAs, the assets belong to the boys individually and we (the parents) are the custodians until they are 18. They don't know about these accounts; they are more concerned with playing baseball and playing with Legos.
Ah, I didn't catch that part. I see why the situation is so difficult. If you can afford to make up the difference, perhaps that is the thing to do. On the other hand, if you can't afford to, perhaps it's time to teach the old "life's not fair" routine. Perhaps you could promise to make it up to the other by helping to pay certain expenses for the other (car, education, trip overseas, etc...?). At worst, you could make it up to the other child in your estate plan.

Good luck,

JT
neil
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Post by neil »

Are you required to split the GI bill benefits evenly? By a quick google search it appears the answer is no. Maybe you could give more GI bill benefits to the older son. By the way I'm an Aggie also. Class of 99. Gig'em.
Neil
Tramper Al
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Post by Tramper Al »

Are you guys big fans of holding individual stocks like this? It does not seem so.

Could you not, gradually year by year, sell off a portion of each individual stock and then direct the proceeds into a more diversified index fund of some kind? Maybe I should say, should you not be doing so anyway to realize those gains which are without tax consequences?

If they were both invested in the same diversified investment vehicle, it would really be a lot simpler matter to work towards evening things up, since they would at least stay in parallel.

With the current situation of 2 individual stocks, who knows. 5 years from now their values could have reversed, but you'd still have the same problem.
Last edited by Tramper Al on Tue Oct 27, 2009 11:20 am, edited 1 time in total.
Dude2
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Post by Dude2 »

Does anyone have any idea of how we can make their accounts "even"? We do not want to sell any of their positions. I'm wondering if it is possible for each son to "give" half of his portfolio to his brother, the effect being that their portfolios would mirror each other. We would have to do this over the course of a couple years so we'd be under the gift tax limitations.
Yes, I think you've hit it on the head. IMO you should start to gift stocks from one account to the other to try your best to even things out. You have years and years to do it.

Or, change it so that each child is a joint owner of each account and let them work it out for themselves when the time comes.

I agree with your need for parity. It only makes sense.
Then ’tis like the breath of an unfee’d lawyer.
InvestingMom
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Post by InvestingMom »

Aggie,
First of all I completely agree with your desire to try to even out the accounts. Yeah life isn't fair, but when it comes to diving out things to kids the best thing a parent can do is be as fair as possible with each of their kids.

I really don't have a solution and you should probably consult an attorney...but I will tell you what I would do. I would simply even it out. Hopefully you can move half the stocks from each account to the other through the broker as the custodian.

Come on, is the younger kid really going to sue you if he finds out later? In fact I would be honest and tell them both when you feel they are old enough to understand. I have to believe that your kids are going to grow up to be good kids and are not ever even going to question this even for a second. It will probably be a source of amusement. If they do question it....well they might stand to lose a lot more (their inheritance...because it sounds like you guys are savers.) However, I would ask my CPA first about the tax consequences.

That is my very dangerous 2 cents ;-)
Ron
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Re: Any suggestions on how to correct this situation

Post by Ron »

aggie91 wrote:Does anyone have any idea of how we can make their accounts "even"?
OK, you have me interested in the subject, so I'll give my $0.02 (that's what it is worth :roll: ).

First of all, we did not have the blessing of more than one child. He does have his BS/CIS from a state university, so we are well aware of the costs involved.

However, in your case, there are certain "unknowns" at this time, IMHO. Will each child want to go to college/university? If so, does each expect the same level of financial support (state vs. national)?

You have one who will start a few years earlier than the other. What does this mean? On a macro view, it may be cheaper (assuming like educational experiences) for the older child. However, the other younger child has a few more years to accumulate gains on investments (assuming a positive return).

IMHO, the decision to "equalize" does not come at the start of matriculation, but at the end. Leave things as they are. If any leftover $$ is there, give it to the person who was lucky to be in the position to be the low cost child.

Is it fair? Heck, who knows? The important thing is that you (as a parent) made a decision to help educate your offspring and made allowances for it in your plans. Any "difference" in cost/expenses can certainly be made in the future, by helping them (or your grandchildren) in the future.

Nobody said life is fair. Your responsibility is not to make sure it is for your children (they have to learn that lesson on their own), but to treat them equally. You can do it on the "back end", as life progresses, IMHO.

Anyway, that's my comment. Good luck to you, in any decision that you make.

- Ron
joppy
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stickler for details

Post by joppy »

First of all, you want to be a stickler for details. You can't gift money from one UTMA to another. However, a UTMA clearly allows money to be spent on the child it belongs to.

See this article here, which describes the use of UTMA assets: Fairmark UTMA Site

So for example, if you end up paying for summer camp for the "richer" child from his UTMA and paying for the summer camp of the "poorer" child from your own funds, that is a perfectly acceptable use of the UTMA. Similarly, for tennis lessons, music classes, pocket money, tickets to baseball games - anything that isn't an obligation of you as a parent to provide. If it is a parental obligation, there are tax implications as described in the article.

You can then use the money you "save" on the richer child to fund more money into the UTMA of the poorer child. Over the next 7 years, depending on the level of discretionary expenses per child, you may be able to even out the accounts to some extent in this manner.

If you do this, I would let your children know you are doing this and your objective so there are no bad feelings later - I know there shouldn't be any bad feelings, but still. You probably should also keep reasonably good records of what you are doing.

Cheers,
Joppy
tonyh
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Post by tonyh »

Aggie,
dont worry about it, they'll never be equal. When my children were born they each got 10k in Fidelity Magellan which had just started when the first came along (thanks to the foresight of their granny). Now they are in their 20s and and 30s they have vastly different amounts, BUT are each wealthier than I am!
Your children too will be thankful for whatever they get.
Tony
Dude2
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Post by Dude2 »

Joppy, that was a good link for the fairmark article. It lead me to another 3-part article that discusses "UTMA regret" which offers some interesting advice. No clear answers, but certainly many options.

http://www.fairmark.com/custacct/regret1.htm
Then ’tis like the breath of an unfee’d lawyer.
Topic Author
aggie91
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Post by aggie91 »

All,

Thanks for the feedback. Many more things for me to consider.

Here's a little more info: Replying to Neil (gig'em!): The Post-9/11 GI Bill is what prompted us to take a more serious look into our sons' accounts. To the best of my understanding, my husband does not have to transfer the benefits 50/50, but he absolutely wants to make sure that each son has equal access to these valuable benefits. Each son will have 18 months of their college education paid for through this benefit (tuition, fees, book allowances, even a housing stipend). Once he was 'approved' for the benefit transfer a few months ago, I started taking a closer look at their 529 accounts and calculated the projected balances to the years when they would go to college. Thankfully, I originally invested them in the Utah Age-Based Option 3 fund which includes indexed funds/bonds and adjusts the allocations automatically as they get older. We've made monthly contributions since they were born and now that we have this source of 'new' college money for them, I'm scaling back my 529 contributions because I don't want to overcontribute. The 529s are great because we can transfer those distributions between siblings (to the best of my understanding) as long as they are used for education expenses. So, I think we are fine with the education planning.....

Now, that leaves me with the two custodial accounts with a fairly large difference b/w the two. I had not considering selling them because of a significant capital gains tax, but perhaps I should consult a CPA. Since they have no earned income, maybe I could indeed sell the stocks without a tax consequence. I had not considered this option. To date, their dividend income has not met the tax-filing threshhold.

Also, a little more background which may explain our situation. My husband and his sister both received shares of stocks as children. When my husband's sister turned 18, according to family legend, she sold her stocks and "went shopping" (cars, clothes, etc.). My husband went to college and became an officer in the Navy and kept on investing. Fortunately, he married me because he realized I loved saving and investing even more than him. We've made mistakes along the way, but we've also made many good decisions which have set us up (and our sons) for a very comfortable lifestyle. We've had the benefit of long-term investing (20 years for me; 30 years for him) and we've just turned 40. I want to set a foundation for our sons so they have the same opportunities as us. I wish I would have discovered the Bogleheads when I first started investing, but I'm grateful that I still have (hopefully) many years ahead of me to learn and fine-tune.
Ron
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Post by Ron »

aggie91 wrote:Fortunately, he married me because he realized I loved saving and investing even more than him.
Where were you in my "prior life" :lol: ...

Seriously, I have no complaints. My wife is more than I could ever have expected (don't know what she sees in me), but I had to make the comment, nevertheless...

- Ron
markcoop
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Re: stickler for details

Post by markcoop »

joppy wrote: So for example, if you end up paying for summer camp for the "richer" child from his UTMA and paying for the summer camp of the "poorer" child from your own funds, that is a perfectly acceptable use of the UTMA. Similarly, for tennis lessons, music classes, pocket money, tickets to baseball games - anything that isn't an obligation of you as a parent to provide. If it is a parental obligation, there are tax implications as described in the article.

You can then use the money you "save" on the richer child to fund more money into the UTMA of the poorer child. Over the next 7 years, depending on the level of discretionary expenses per child, you may be able to even out the accounts to some extent in this manner.

Joppy
That's exactly what I was going to suggest. There are a number of ways to do this without paying taxes:
1) Sell from the richer account up to the point where you would have to pay taxes.
2) Don't re-invest dividends in the richer account
Mark
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