Kids inherited $8,000 each - 529 or regular brokerage?

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ParlayBogle
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Kids inherited $8,000 each - 529 or regular brokerage?

Post by ParlayBogle » Wed Oct 17, 2018 7:28 pm

My minor kids (8 & 12), inherited $8,000 each. My first instinct was to put into a custodial 529, as they are both likely to go to college and can enjoy the tax free growth.

However, my understanding of how a regular custodial brokerage works with the new tax law is that as long as I tax gain harvest every year, the accounts are unlikely to ever be taxed in the near future, as each account would need to have $2,100 in gains in any given year. My thinking is that I could always put it into a 529 for them at a later date if the situation changes, or it is more advantageous for FAFSA purposes.

It seems like a more flexible approach. Am I missing anything?

workerbeeengineer
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by workerbeeengineer » Thu Oct 18, 2018 12:21 am

I don’t recognize the term “custodial 529”. A 529 plan incurs no tax on earnings if the proceeds are utilized for legitimate college expenses ( tuition, fees, room & board, etc.)

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celia
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by celia » Thu Oct 18, 2018 1:39 am

ParlayBogle wrote:
Wed Oct 17, 2018 7:28 pm
My thinking is that I could always put it into a 529 for them at a later date if the situation changes, or it is more advantageous for FAFSA purposes.

It seems like a more flexible approach. Am I missing anything?
Remember that if the kids inherited some money, it is THEIR money, not yours. "They" could put their own money into a 529 plan, but it will count against financial aid more than if you or the grandparents put the money in. If their money was put into a Uniform Gift to Minor Act (UGMA/UTMA) it would also count against their aid (more would be expected to be spent on college each year either way than if it was in the parents' name). However, the growth would be tax-free in a 529 plan, if the 529 restrictions are followed. If the children do not go to college, the UGMA/UTMA would be better.

https://www.investopedia.com/articles/p ... al-aid.asp

986racer
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by 986racer » Thu Oct 18, 2018 5:53 am

I think the rules changed on a 529 so that it is now treated the same as being owned by the parent for purposes of financial aid calculations

Chadnudj
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by Chadnudj » Thu Oct 18, 2018 6:13 am

Here's a weird question, but:

How do you think the decedent would have wanted your kids to have used this money?

If you follow the values of the person who left this money to your kids, you can't go wrong. I know when I inherited money at a young age from my great aunt (who was basically another grandparent to me), my parents talked with me about it and the person who left me the money, and we decided the best place to put the money was in college savings because she valued education. But we also kept a small amount and spent it on a new pair of shoes because this same great aunt would take my brothers and I out and buy us shoes every year for Christmas.

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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by DarthSage » Thu Oct 18, 2018 7:01 am

Chadnudj wrote:
Thu Oct 18, 2018 6:13 am
Here's a weird question, but:

How do you think the decedent would have wanted your kids to have used this money?

If you follow the values of the person who left this money to your kids, you can't go wrong. I know when I inherited money at a young age from my great aunt (who was basically another grandparent to me), my parents talked with me about it and the person who left me the money, and we decided the best place to put the money was in college savings because she valued education. But we also kept a small amount and spent it on a new pair of shoes because this same great aunt would take my brothers and I out and buy us shoes every year for Christmas.
I think this is a very valid statement. It's not your money, it was a gift to your children. Obviously, they're not of an age where I'd be handing them complete control of it, but they're old enough to start a dialog. Talk to them about the individual who gifted them this, how can they honor that person's intent? It's also a great way to start them on the "set it and forget it" style of investing--they can see the money growing, while they just leave it alone.

My kids each inherited $$ when their grandmother died last year. Theirs was in a trust, with stipulations. They each get their largest/final portion at age 30--they are currently 23, 21, 15, and 12. When we discuss the money, we talk about Grandma's values and wish for them--in our case, she placed high value on education and travel. Our oldest got her first payout (~$15k), and put some in a Roth, and is spending some on travel. I think this is reasonable and appropriate. DH controls the bulk of these funds for the younger children. We talk to them about legacy, and how we (parents) have a duty to both our children and their grandmother, to invest this money wisely. It really provides a great opportunity to discuss both investment strategy and family values.

ParlayBogle
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by ParlayBogle » Thu Oct 18, 2018 8:00 am

workerbeeengineer wrote:
Thu Oct 18, 2018 12:21 am
I don’t recognize the term “custodial 529”. A 529 plan incurs no tax on earnings if the proceeds are utilized for legitimate college expenses ( tuition, fees, room & board, etc.)
It's their money. If I open up a 529, they are the owners of the accounts. Because they are minors, there would need to be a custodian.
celia wrote:
Thu Oct 18, 2018 1:39 am
Remember that if the kids inherited some money, it is THEIR money, not yours. "They" could put their own money into a 529 plan, but it will count against financial aid more than if you or the grandparents put the money in. If their money was put into a Uniform Gift to Minor Act (UGMA/UTMA) it would also count against their aid (more would be expected to be spent on college each year either way than if it was in the parents' name). However, the growth would be tax-free in a 529 plan, if the 529 restrictions are followed. If the children do not go to college, the UGMA/UTMA would be better.

https://www.investopedia.com/articles/p ... al-aid.asp
I'm not sure what about my statement implied that I am not treating it as their money. The money will count against their financial aid in the case of UGMA or 529, but this seems to be a pretty dynamic part of the law and could change in the next 6-10 years.

ParlayBogle
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by ParlayBogle » Thu Oct 18, 2018 8:03 am

DarthSage wrote:
Thu Oct 18, 2018 7:01 am


I think this is a very valid statement. It's not your money, it was a gift to your children. Obviously, they're not of an age where I'd be handing them complete control of it, but they're old enough to start a dialog. Talk to them about the individual who gifted them this, how can they honor that person's intent?
Again, I'm not sure what about my OP implied that I am treating this as my money rather than theirs.

Their grandmother would have wanted the money to benefit them to the maximum possible. This means in any case that it should be invested and allowed to grow with minimum expense and taxation possible. Because they are likely to go to college, and I am unlikely to be able to fully fund their college, this points to putting it in a 529 for them to minimize their eventual reliance on student loans.

However, as I mentioned in the OP, it seems like the money could also grow tax free in a regular brokerage account and retain more flexibility. No one has addressed the pros/cons of this choice directly.

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8foot7
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by 8foot7 » Thu Oct 18, 2018 8:08 am

In particular have you asked your 12 year old what he or she would like to do with the money?

I think other posters (including me) are getting a whiff that you’re just treating this money as your own because you are talking about how to invest it, and in particular in a vehicle that essentially locks the money up for a specific purpose. You haven’t mentioned that you had a discussion with your kids about the money, especially the older one.

Ultimately as guardian you should be putting the money in a relatively risk free place that keeps options open for your children unless they have specifically consented to using it for college. And I don’t think an eight year old is capable of that consent
Last edited by 8foot7 on Thu Oct 18, 2018 8:40 am, edited 1 time in total.

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llama
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by llama » Thu Oct 18, 2018 8:34 am

I have just been using regular UTMA accounts for the kids' money and tax gain harvesting yearly. (Though I haven't yet fully digested how the new tax law has changed things.)

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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by aristotelian » Thu Oct 18, 2018 8:59 am

8foot7 wrote:
Thu Oct 18, 2018 8:08 am


Ultimately as guardian you should be putting the money in a relatively risk free place that keeps options open for your children unless they have specifically consented to using it for college. And I don’t think an eight year old is capable of that consent
Not true at all. A guardian is a guardian in order to make these decisions. You are allowed to invest according to the prudent investor standard based on modern portfolio theory. You do not need to put it in a savings account. I am a court appointed guardian of a two comma inheritance for my kids and you better believe those funds are invested.

It does matter legally whether the funds are in OPs name or in the kids name, but even if they are in the kids name he may be empowered to invest on their behalf.

ParlayBogle
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by ParlayBogle » Thu Oct 18, 2018 9:02 am

8foot7 wrote:
Thu Oct 18, 2018 8:08 am
In particular have you asked your 12 year old what he or she would like to do with the money?

I think other posters (including me) are getting a whiff that you’re just treating this money as your own because you are talking about how to invest it, and in particular in a vehicle that essentially locks the money up for a specific purpose. You haven’t mentioned that you had a discussion with your kids about the money, especially the older one.

Ultimately as guardian you should be putting the money in a relatively risk free place that keeps options open for your children unless they have specifically consented to using it for college. And I don’t think an eight year old is capable of that consent
Ok fair enough. I think "treating it as my own" means appropriating it for my own benefit.

I appreciate the sentiment of discussing with the kids, and I certainly will explain that it's their money and why I'm doing what I am doing. However, there really isn't a planet where as their guardian I would do anything other than allow it to grow tax free until they reach age of majority.

KlangFool
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by KlangFool » Thu Oct 18, 2018 9:07 am

OP,

I will keep that money in my own taxable account. Then, when they are old enough and work some summer jobs, move the money into their Roth IRAs.

Only if I am absolutely sure that they do not need financial aid, I would put the money into their taxable account and/or 529.

KlangFool

P.S.: My kids have about 20K to 30K each, They are in college.

P.S.2: The money is invested in the Vanguard Lifestrategy Growth Fund.
Last edited by KlangFool on Thu Oct 18, 2018 9:11 am, edited 2 times in total.

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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by bloom2708 » Thu Oct 18, 2018 9:10 am

I would open 2 brokerage accounts at Vanguard.

The accounts are in your name for now.

80% Total US, 20% Int-Term Tax-Exempt bond index.

Maybe put $500 or $1,000 in a savings account for them to consider spending. The balance is invested for college.

We did 50% to 529s for each kid and 50% to a Vanguard brokerage account for each kid. Accounting for scholarships, Non-college, American Opportunity Tax Credit (if extended), etc.

Invest somewhat aggressively until they are approaching college age, then back off on the stocks. Our oldest is a freshman. All conservative now. Limited-Term Bonds.
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by MrBeaver » Thu Oct 18, 2018 9:12 am

KlangFool wrote:
Thu Oct 18, 2018 9:07 am
OP,

I will keep that money in my own taxable account. Then, when they are old enough and work some summer jobs, move the money into their Roth IRAs.

Only if I am absolutely sure that they do not need financial aid, I would put the money into their taxable account and/or 529.

KlangFool

P.S.: My kids have about 20K to 30K each, They are in college.
This.

Also remember that Roth money is not included in FAFSA, so if the goal in using a 529 is to keep the money out of the student's asset pool for financial aid reasons, a Roth is far superior to a custodial 529 and is more flexible (contributions can be withdrawn tax free, but you should counsel them not to do that and teach about compound interest as the reason).

KlangFool
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by KlangFool » Thu Oct 18, 2018 9:18 am

MrBeaver wrote:
Thu Oct 18, 2018 9:12 am
KlangFool wrote:
Thu Oct 18, 2018 9:07 am
OP,

I will keep that money in my own taxable account. Then, when they are old enough and work some summer jobs, move the money into their Roth IRAs.

Only if I am absolutely sure that they do not need financial aid, I would put the money into their taxable account and/or 529.

KlangFool

P.S.: My kids have about 20K to 30K each, They are in college.
This.

Also remember that Roth money is not included in FAFSA, so if the goal in using a 529 is to keep the money out of the student's asset pool for financial aid reasons, a Roth is far superior to a custodial 529 and is more flexible (contributions can be withdrawn tax free, but you should counsel them not to do that and teach about compound interest as the reason).
MrBeaver,

That is the secondary goal of this approach. The Roth IRAs will serve as my kids emergency funds.

KlangFool

ParlayBogle
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by ParlayBogle » Thu Oct 18, 2018 9:33 am

Putting the $ in my own name is not something I'm willing to do, even if it's optimal. It's their money, and I cannot just appropriate it.

aristotelian
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by aristotelian » Thu Oct 18, 2018 9:39 am

ParlayBogle wrote:
Thu Oct 18, 2018 9:33 am
Putting the $ in my own name is not something I'm willing to do, even if it's optimal. It's their money, and I cannot just appropriate it.
Where is the money now? If it was given as a check in their name, I don't think putting it in your name would even be an option. Not sure about 529.

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8foot7
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by 8foot7 » Thu Oct 18, 2018 10:28 am

aristotelian wrote:
Thu Oct 18, 2018 8:59 am
8foot7 wrote:
Thu Oct 18, 2018 8:08 am


Ultimately as guardian you should be putting the money in a relatively risk free place that keeps options open for your children unless they have specifically consented to using it for college. And I don’t think an eight year old is capable of that consent
Not true at all. A guardian is a guardian in order to make these decisions. You are allowed to invest according to the prudent investor standard based on modern portfolio theory. You do not need to put it in a savings account. I am a court appointed guardian of a two comma inheritance for my kids and you better believe those funds are invested.

It does matter legally whether the funds are in OPs name or in the kids name, but even if they are in the kids name he may be empowered to invest on their behalf.
I didn't say not to invest it. I'm referring to the decision to put the funds in a vehicle that will penalize them if they choose not to use the money in a certain way (529).

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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by DarthSage » Thu Oct 18, 2018 4:19 pm

Personally, I'm not such a fan of 529s. I'm sure a lot of people here would argue with me--I think they limit the options. What if a child doesn't go to college? Yeah, sure the funds could grow and provide college for their future children, but that doesn't seem fair. This was a gift to the children you have now, not your potential future grandchildren. What if the child wants to start a business? Or buy a house?

We go with UTMAs. I believe the inherited money is in custodial accounts, since the original trust stipulated that DH have control until the child turns age 30. My kids' UTMAs were set up by the grandmother, ages ago. She also had a 529, designated for our oldest, who has graduated. We're in the process of re-titling that to benefit kid #3 (our second child is a community college kid--we cashflow his education, no 529 needed).

I think that #8foot7 and I are of similar minds as to how we read your post.

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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by CedarWaxWing » Thu Oct 18, 2018 4:36 pm

I would consider the advantages of encouraging them to invest in a simple taxable mutual fund account until they have earnings. As they begin earnings on their own I would then consider matching some of their earnings (i.e. matching their earnings at some level) if they constribute to their own Roth IRAs.

If necessary the Roth accounts can be used for higher education, but don't disqualify someone from financial aid.. I think.

DIFAR31
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by DIFAR31 » Thu Oct 18, 2018 5:36 pm

A custodian 529 account is a 529 that is owned by a minor, funded with money that is owned by the minor, and managed by the custodian until the minor reaches the age of majority. Sometimes referred to as a UTMA/UGMA 529.

Custodian 529 accounts are treated by FAFSA as a parent asset and as such they don't increase the Expected Family Contribution (EFC) to the same degree that a similar size asset would if it was reported on FAFSA as a student asset (5.6% vs. 20%).

A regular non-529 UTMA/UGMA account will be reported on FAFSA as a student asset.

Distributions from student-owned (custodial) and parent-owned 529 accounts are not reported as income on financial aid forms. Distributions from a student Roth IRA would need to be reported as student income on financial aid forms, with the resulting increase in EFC.

Lots of moving parts here, but there are plenty of reasons to consider using a custodial 529 account. Of course, there's always the risk that the child will not use all or any of the 529 funds for qualified education expenses, but that just means that the child has enjoyed x number of years of tax deferred growth, and will possibly be on the hook for the 10% additional tax as well (there are exceptions to the application of the additional tax).

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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by Grt2bOutdoors » Thu Oct 18, 2018 5:42 pm

The UTMA is the least restrictive of the options. If you need to pay for college- that is what the money is there for. What is better? Taking a loan or not having debt and not paying interest? I’d rather come out with a clean slate.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by inbox788 » Thu Oct 18, 2018 6:15 pm

DarthSage wrote:
Thu Oct 18, 2018 7:01 am
I think this is a very valid statement. It's not your money, it was a gift to your children. Obviously, they're not of an age where I'd be handing them complete control of it, but they're old enough to start a dialog. Talk to them about the individual who gifted them this, how can they honor that person's intent? It's also a great way to start them on the "set it and forget it" style of investing--they can see the money growing, while they just leave it alone.
Given the modest amount, I'd consider it "family money". While technically it's the child's money, the parents will still contribute substantially to college costs. I wouldn't do this, but technically, couldn't you charge the kids rent, food expenses, utilities, clothing, transportation, etc. until the $8k was depleted? Then your $8k in savings could be placed in your 529 or whatever best meets the family need.

DIFAR31
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by DIFAR31 » Thu Oct 18, 2018 6:20 pm

Grt2bOutdoors wrote:
Thu Oct 18, 2018 5:42 pm
The UTMA is the least restrictive of the options. If you need to pay for college- that is what the money is there for. What is better? Taking a loan or not having debt and not paying interest? I’d rather come out with a clean slate.
If you're confident that the money is needed/will be used for college expenses, than a custodial 529 is better than a conventional UTMA account, for at least two reason: there is lesser impact on need-based financial aid, and the growth is tax free.

DIFAR31
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by DIFAR31 » Thu Oct 18, 2018 6:24 pm

inbox788 wrote:
Thu Oct 18, 2018 6:15 pm
Given the modest amount, I'd consider it "family money". While technically it's the child's money, the parents will still contribute substantially to college costs. I wouldn't do this, but technically, couldn't you charge the kids rent, food expenses, utilities, clothing, transportation, etc. until the $8k was depleted? Then your $8k in savings could be placed in your 529 or whatever best meets the family need.
I think you'll run into legal issues, never mind the ethical and moral issues, if you try to charge your minor children for those things that you are obligated to provide to them.

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celia
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by celia » Thu Oct 18, 2018 7:23 pm

DIFAR31 wrote:
Thu Oct 18, 2018 5:36 pm
A custodian 529 account is a 529 that is owned by a minor, funded with money that is owned by the minor, and managed by the custodian until the minor reaches the age of majority. Sometimes referred to as a UTMA/UGMA 529.

Custodian 529 accounts are treated by FAFSA as a parent asset and as such they don't increase the Expected Family Contribution (EFC) to the same degree that a similar size asset would if it was reported on FAFSA as a student asset (5.6% vs. 20%).

A regular non-529 UTMA/UGMA account will be reported on FAFSA as a student asset.

Distributions from student-owned (custodial) and parent-owned 529 accounts are not reported as income on financial aid forms. Distributions from a student Roth IRA would need to be reported as student income on financial aid forms, with the resulting increase in EFC.
I was not aware of there being a "custodian 529" (aka UTMA/UGMA 529) account type. I think part of the earlier confusion, at least for me, was that I had always heard of a 529 account as money contributed by a parent or other other relative FOR THE BENEFIT OF the minor child (beneficiary). Of course, an adult can set up a 529 account for their own future use too.

So I saw the original options as:
UTMA/UGMA vs 529

when the OP meant:
UTMA/UGMA vs custodian 529.

I think many of us thought this too. So my apologies. Since the inherited money belongs to the kids, only the second set of choices now makes sense to me. So if the value of the custodian 529 will be counted as a parent asset come FAFSA time, I think the custodian 529 is the better choice because the growth will be tax-free AND the account value counts less against the Expected Family Contribution (EFC) than the UTMA/UGMA would. I also don't think you need to discuss any of this with the child since it is the custodian's decision to be made. But, be sure to tell them that grandma left them some money to help them pay for college. You don't need to ASK THEM any questions about their preferences since that is above their current "pay grade".

I would keep it simple rather than changing from UTMA/UGMA to custodian 529 mid-way (unless you suspect they won't go to college). You won't have to report anything on your taxes (or take gains each year) until you withdraw from the account, probably in their last year of college, if they receive financial aid.

The one thing I wouldn't do is put it in a parent account with them as beneficiaries. That doesn't make sense since they already inherited the money. They can't inherit it again (should you die).

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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by Grt2bOutdoors » Thu Oct 18, 2018 7:43 pm

DIFAR31 wrote:
Thu Oct 18, 2018 6:20 pm
Grt2bOutdoors wrote:
Thu Oct 18, 2018 5:42 pm
The UTMA is the least restrictive of the options. If you need to pay for college- that is what the money is there for. What is better? Taking a loan or not having debt and not paying interest? I’d rather come out with a clean slate.
If you're confident that the money is needed/will be used for college expenses, than a custodial 529 is better than a conventional UTMA account, for at least two reason: there is lesser impact on need-based financial aid, and the growth is tax free.
Growth in an UTMA can be tax-free as well if one Tax Gain Harvests. Look up the increased amounts that can be harvested on a tax free basis with new tax laws. On $8k, how much in gains do you think you’re going to be making?

Again - the purpose of money is to “use” it towards the expenses at hand. Here’s an example of it in action - cost of school in year 1 is $20,000. School sees child has $8k in the bank - school says child must contribute 20% of it towards cost, cost to child is $1,600. That is $1,600 less in the account but it also is $1,600 less in loans. It’s a myth that need based aid is “something for nothing”, the student will pay. Need based aid is not the same as “merit/grant”.
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inbox788
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by inbox788 » Thu Oct 18, 2018 7:58 pm

DIFAR31 wrote:
Thu Oct 18, 2018 6:24 pm
inbox788 wrote:
Thu Oct 18, 2018 6:15 pm
Given the modest amount, I'd consider it "family money". While technically it's the child's money, the parents will still contribute substantially to college costs. I wouldn't do this, but technically, couldn't you charge the kids rent, food expenses, utilities, clothing, transportation, etc. until the $8k was depleted? Then your $8k in savings could be placed in your 529 or whatever best meets the family need.
I think you'll run into legal issues, never mind the ethical and moral issues, if you try to charge your minor children for those things that you are obligated to provide to them.
Where's the required list and amount? Most kids this day receive quite more than is ethically and morally required. You might even get away with upcharging for home WiFi (by the hour?) and they can do without if they don't pay! :shock: So basic rent is out, and 3 squares a day, but the desserts? And $5 ice cream cones on the weekends? And that fancy expensive shirt or pants they want? Trips to school, no, but trips to the mall? Charge government mileage rate or likely higher Uber rate? Make that Uber Black!

https://www.wisebread.com/21-things-you ... ds-pay-for

AFAIK, paying for college isn't required. One semester of private tuition will wipe out the child's windfall.

Oh, and I forgot a cell phone and service. Or is that a Basic Teen Right now since the passage of the 28th Amendment?

Living Free
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by Living Free » Thu Oct 18, 2018 8:13 pm

This thread is interesting. I have two children who each have 529 plans and have struggled with this decision as well (when they get checks for christmas/birthday from their great-grandparents), 529 vs UTMA account. I was doing just 529 for a while, but when my daughter turned 3 I opened a UTMA. I'd like for her to have some of her own money and freedom to spend it and for us to be able to discuss investing (educational opportunity)

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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by DarthSage » Fri Oct 19, 2018 5:41 am

inbox788 wrote:
Thu Oct 18, 2018 6:15 pm
DarthSage wrote:
Thu Oct 18, 2018 7:01 am
I think this is a very valid statement. It's not your money, it was a gift to your children. Obviously, they're not of an age where I'd be handing them complete control of it, but they're old enough to start a dialog. Talk to them about the individual who gifted them this, how can they honor that person's intent? It's also a great way to start them on the "set it and forget it" style of investing--they can see the money growing, while they just leave it alone.
Given the modest amount, I'd consider it "family money". While technically it's the child's money, the parents will still contribute substantially to college costs. I wouldn't do this, but technically, couldn't you charge the kids rent, food expenses, utilities, clothing, transportation, etc. until the $8k was depleted? Then your $8k in savings could be placed in your 529 or whatever best meets the family need.
Sorry, I don't get the logic on the "family money" thing. All money that has ever been given to our kids, we put in their name. I figure, it's a great way to get them started on saving and investing. Obviously, we still control it--DS12 may WANT an iPhoneXS, he may have the funds in his savings account to purchase an iPhoneXS...but, he's not getting an iPhoneXs! But, DH and I would never touch their money--ever. We'd sell our plasma first.

And the idea of charging a minor for room/board/expenses just smacks of one of those celebrity divorces, where the ex wants to live in the style to which he/she's become accustomed, so the child support pays for fancy cars and lavish vacations.

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8foot7
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by 8foot7 » Fri Oct 19, 2018 6:05 am

I realize I may be in a minority here, but I do think there is an ethical issue with a parent deciding that this money that doesn't belong to the parent will be used for college, and I do think a 12 year old is old enough to have a discussion about where that money might go -- a first car, a summer course somewhere, perhaps an international trip or two, or sure, perhaps college. And precisely because the eight year old is too young to decide those things, the money should be invested in a vehicle that doesn't limit choices down the road.

The guardian's role ought to be to protect against stupid immature decisions and look after the money for the benefit of the child when he or she reaches majority.

This particular problem is why my wife and I will leave everything to our next generation without trying to skip generations. I trust my sons to take care of their sons, just as my grandfather trusted my parents to take care of me.

I have a 9 and a 2 year old and if they inherited 8k each, I'd have it in UTMA/UGMA accounts at Schwab and I'd put it in an S&P 500 index and let it ride.

It is not, in any way, by any means, family money. Now at 18 the family could say, look, you have this money, and we're going to pay for all but that amount for your college, but the choice remains with the child--the child could take a loan, or decide to pay for the remainder of school. Or the family could say, you bought your own car, we'll front more for college since we didn't have to do that.

ParlayBogle
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by ParlayBogle » Fri Oct 19, 2018 8:27 am

Thanks for all the replies. At this point I'm considering just splitting the baby. Put $4k into their existing Vanguard UTMAs (which each have about $1k already), and $4k into a custodial 529.

inbox788
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by inbox788 » Fri Oct 19, 2018 12:09 pm

DarthSage wrote:
Fri Oct 19, 2018 5:41 am
Sorry, I don't get the logic on the "family money" thing. All money that has ever been given to our kids, we put in their name. I figure, it's a great way to get them started on saving and investing. Obviously, we still control it--DS12 may WANT an iPhoneXS, he may have the funds in his savings account to purchase an iPhoneXS...but, he's not getting an iPhoneXs! But, DH and I would never touch their money--ever. We'd sell our plasma first.

And the idea of charging a minor for room/board/expenses just smacks of one of those celebrity divorces, where the ex wants to live in the style to which he/she's become accustomed, so the child support pays for fancy cars and lavish vacations.
In essence it's the one bucket vs. many buckets discussion. OP asked about fund placement and titling and someone chimed in about 529 in child name vs parents name (I'm still not clear if it makes a difference). There's also concern about FAFSA optimization. My point is that we're not talking about huge amounts of money, and the amounts we're discussing can be moved around to where it's most efficient. One bucket.

And use of charging rent isn't to raise it by 5% and maximize your rental property, but to instill some sense of cost to living space to children that may not have any idea until they try to move out on their own (but anyway, charging for basic food and rent may not be allowed until they're 18). Or they may to come to the realization that staying at home for as long as possible for free is very nice and take full advantage of the situation. Anyway, if having the 529 in parents name is more advantageous than in student name (or similar transfer), it's to help legitimize why you moved $800 from child's bank account to yours so you can fund a 529 or other use (your tIRA?) (doing so with your celebrity child and moving $800,000 would not be so easy).
ParlayBogle wrote:
Fri Oct 19, 2018 8:27 am
Thanks for all the replies. At this point I'm considering just splitting the baby. Put $4k into their existing Vanguard UTMAs (which each have about $1k already), and $4k into a custodial 529.
The amounts are relative small that I wouldn't bother managing an extra account at this time. For simplicity, just pick the one that you think will be more advantageous and fill it up until there's a reason to stop. How do you envision using the UTMAs funds? Is the Kiddie Tax limit a factor or at what account size will it become an issue? My inclination without too much thought would be to prioritize the 529 until you decide it has too much money, which should take a while. Are you lucky to live in a state with 529 tax incentives? If all the funds are spent on college (529 qualified expenses), I'm not seeing any advantage of UTMAs. The main benefit is the flexibility, but it's a more complicated than a 529.

If you get a $5000 year and bonus, do you add to the UTMA? 529? Go on a vacation? You could always split it 3 ways. Wait, you could pay off extra mortgage. Make it 4 ways, etc.
Last edited by inbox788 on Fri Oct 19, 2018 12:30 pm, edited 1 time in total.

DIFAR31
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Re: Kids inherited $8,000 each - 529 or regular brokerage?

Post by DIFAR31 » Fri Oct 19, 2018 12:28 pm

inbox788 wrote:
Fri Oct 19, 2018 12:09 pm
OP asked about fund placement and titling and someone chimed in about 529 in child name vs parents name (I'm still not clear if it makes a difference).
It makes no difference for financial aid calculated using FAFSA; it may or may not make a difference for institutional aid calculated by schools that use Profile, depending on specific school policies.

But the bottom line here is the legal ownership of the funds that are contributed to the 529. Money that legally belongs to a child, such as an inheritance, should not be placed in a parent-owned 529. And the big distinction between a 529 owned by a child and a 529 owned by a parent becomes apparent when the child reaches the age of majority and is able to take full control of a child-owned account as the custodian (in most cases probably a parent) steps aside.

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