Grandad gifted FAGIX in UTMA account

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vinnydabody
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Grandad gifted FAGIX in UTMA account

Post by vinnydabody » Sun Oct 08, 2017 4:44 am

So my dad had us all set up UTMA accounts for each of his grandkids at Fidelity this year. He's starting to fund the accounts now. There's around $11k of Fidelity Capital and Income (FAGIX) that showed up recently. According to the purchase data that came with the transfer it has a built-in LTCG of about $1700.

It's about a 20/80 bond/stock mix, 0.73% ER. Since the gain is under the kiddie tax threshhold (my son is 10 and doesn't have any other income) I'm thinking I will harvest the gain and exchange out the FAGIX for a Fidelity-style three fund portfolio. He'll pay zero in capital gains tax and have a more appropriate asset allocation for this account.

Anybody see potential pitfalls with this strategy? I'm thinking I'll let my dad know I'm planning to do this as a courtesy (he has a personal Fidelity advisor, not sure if he would find out about the exchange) but I don't believe his feelings will be hurt. I suppose if he's planning to do another gift next year I could wait until then since with the fund minimums if I went with any bond allocation at all he'd be way overweighted to bonds (22%) if I set things up now.

My son also has a 529 account that we set up (Illinois Bright Start Savings, which uses Vanguard for their index portfolios):
- $3251 Index Equity Portfolio (underlying funds Vanguard Total Stock Market Index Fund 56%, Vanguard Total International Stock Index Fund 36%, Vanguard REIT Index Fund 8%)
- $11,490 Index Moderate Age 9-10 (underlying funds Vanguard Total Stock Market Index Fund 36.0%, Vanguard Total International Stock Index Fund 19.0%, Vanguard Total Bond Market Index Fund 17.0%, Vanguard Short-Term Bond Index Fund 9.0%, Vanguard High-Yield Corporate Fund 5.0%, Vanguard Total International Bond Index Fund 5.0%, Vanguard REIT Index Fund 5.0%, Vanguard Short-Term Inflation-Protected Securities Index Fund 4.0%)

so I supposed I could work that into the total portfolio setup.
Last edited by vinnydabody on Sun Oct 08, 2017 5:08 am, edited 1 time in total.

livesoft
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Re: Grandad gifted FAGIX in UTMA account

Post by livesoft » Sun Oct 08, 2017 5:06 am

That's what I would do. I'll suggest FFNOX as the index fund to exchange into. Check it out.
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vinnydabody
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Re: Grandad gifted FAGIX in UTMA account

Post by vinnydabody » Sun Oct 08, 2017 5:11 am

livesoft wrote:
Sun Oct 08, 2017 5:06 am
That's what I would do. I'll suggest FFNOX as the index fund to exchange into. Check it out.
Very interesting, thanks!

BTW I update my original post with extra info, not sure if that would change your suggestion (guessing not).

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CyclingDuo
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Re: Grandad gifted FAGIX in UTMA account

Post by CyclingDuo » Sun Oct 08, 2017 9:54 am

vinnydabody wrote:
Sun Oct 08, 2017 4:44 am
So my dad had us all set up UTMA accounts for each of his grandkids at Fidelity this year. He's starting to fund the accounts now. There's around $11k of Fidelity Capital and Income (FAGIX) that showed up recently. According to the purchase data that came with the transfer it has a built-in LTCG of about $1700.

It's about a 20/80 bond/stock mix, 0.73% ER. Since the gain is under the kiddie tax threshhold (my son is 10 and doesn't have any other income) I'm thinking I will harvest the gain and exchange out the FAGIX for a Fidelity-style three fund portfolio. He'll pay zero in capital gains tax and have a more appropriate asset allocation for this account.

Anybody see potential pitfalls with this strategy? I'm thinking I'll let my dad know I'm planning to do this as a courtesy (he has a personal Fidelity advisor, not sure if he would find out about the exchange) but I don't believe his feelings will be hurt. I suppose if he's planning to do another gift next year I could wait until then since with the fund minimums if I went with any bond allocation at all he'd be way overweighted to bonds (22%) if I set things up now.

My son also has a 529 account that we set up (Illinois Bright Start Savings, which uses Vanguard for their index portfolios):
- $3251 Index Equity Portfolio (underlying funds Vanguard Total Stock Market Index Fund 56%, Vanguard Total International Stock Index Fund 36%, Vanguard REIT Index Fund 8%)
- $11,490 Index Moderate Age 9-10 (underlying funds Vanguard Total Stock Market Index Fund 36.0%, Vanguard Total International Stock Index Fund 19.0%, Vanguard Total Bond Market Index Fund 17.0%, Vanguard Short-Term Bond Index Fund 9.0%, Vanguard High-Yield Corporate Fund 5.0%, Vanguard Total International Bond Index Fund 5.0%, Vanguard REIT Index Fund 5.0%, Vanguard Short-Term Inflation-Protected Securities Index Fund 4.0%)

so I supposed I could work that into the total portfolio setup.
Sounds like a good strategy and use of the Kiddie Tax. We chose to use the commission free iShares at Fidelity for our kids in their Three Fund investment ROTH IRA's (we say "kids", but they are adults now) due to their portability, low ER fees, and no investment minimums (outside of the share price). Reinvest dividends enabled, of course.

iShares Core S&P Total Market ETF (ITOT) - ER .03%
iShares Core MSCI Total International Stock ETF (IXUS) - ER .11%
iShares Core Total U.S. Bond Market ETF (AGG) - ER .05%

Fidelity Total Market Index Fund Investor Class (FSTMX) or Premium Class (FSTVX)
Fidelity Total International Index Fund Investor Class (FTIGX) or Premium Class (FTIPX)
Fidelity U. S. Bond Index Fund Investor Class (FBIDX) or Premium Class (FSITX)

We went a different route with the UTMA accounts which have been invested in individual stocks for 22-24 years with the DRIPs enabled, and now have been turned over to them as their own brokerage accounts. Their ROTH and 401k's are all going into index funds to provide their core positions for the next decades.

I think your strategy of telling your father about your desire to diversify to the three fund portfolio and taking advantage of the kiddie tax while you can to absorb the past gains will pay off as it is a great tax strategy to reset the cost basis.
Last edited by CyclingDuo on Sun Oct 08, 2017 10:03 am, edited 1 time in total.

livesoft
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Re: Grandad gifted FAGIX in UTMA account

Post by livesoft » Sun Oct 08, 2017 10:12 am

I would still recommend FFNOX and tax-gain harvesting up to the kiddie-tax limits each year. The main reason is simplicity. A secondary reason is that it is a Fidelity fund of index funds that is passively-manage, low-expense ratio and basically inline with Granddad's Fidelity philosophy. A portfolio of ETFs or multiple funds would be too complicated for this amount of money.

I am speaking from experience as my kids had UTMA accounts from their grandmother and got old enough to move them to their own accounts. I have had to teach my children how to unwind these accounts without causing them extra taxes. Also I have had to teach them how a taxable account affects their tax returns and how to fill out Schedule B and Schedule D. As you might have seen, I am not bothered by complicated tax returns for myself, but I think young adults are better off easing into it.

Bottom line: Not only now, but for the end game, I suggest making things very simple, hence FFNOX or a Fidelity Index Freedom fund.
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Spirit Rider
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Re: Grandad gifted FAGIX in UTMA account

Post by Spirit Rider » Sun Oct 08, 2017 10:41 am

I didn't see it mentioned, but if Grandad will really get upset by this. The waiting period only applies to tax loss harvesting. With tax gain harvesting, you can sell a security one day and buy the exact same security the next day.

Not withstanding that, I completely agree with livesoft's last post, FFNOX is a great simple fund for this situation. For all you know Grandad is intentionally gifting the highly appreciated shares, because he knows you can tax gain harvest them tax-free under the kiddie tax.

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Re: Grandad gifted FAGIX in UTMA account

Post by CyclingDuo » Sun Oct 08, 2017 12:52 pm

Spirit Rider wrote:
Sun Oct 08, 2017 10:41 am
I didn't see it mentioned, but if Grandad will really get upset by this. The waiting period only applies to tax loss harvesting. With tax gain harvesting, you can sell a security one day and buy the exact same security the next day.

Not withstanding that, I completely agree with livesoft's last post, FFNOX is a great simple fund for this situation. For all you know Grandad is intentionally gifting the highly appreciated shares, because he knows you can tax gain harvest them tax-free under the kiddie tax.
Our only beef with the FFNOX used to be the expense ratio for the fund, plus the expense ratio for all of the underlying funds that totaled up to .22% or so. Luckily it is down now to .11% net which is a hair more than the Three Fund iShares portfolio. Not that a few bucks a year is seriously going to matter over a 30-40 year time frame, but suffice it to say it did color our decision to go with the lower cost iShares at the time for the ROTH IRA's our kids started with their part-time job income a few years back.

Good news is there are some excellent choices these days with low costs.

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Re: Grandad gifted FAGIX in UTMA account

Post by livesoft » Sun Oct 08, 2017 1:15 pm

CyclingDuo wrote:
Sun Oct 08, 2017 12:52 pm
Our only beef with the FFNOX used to be the expense ratio for the fund, ...
The net expense ratio of FFNOX is 0.11%, and that includes the expenses of the underlying funds. So if that's your beef, I don't know what to say except that you have gone off the deep edge.

I don't think one should keep FFNOX in a taxable account forever, but it is a great starter fund and tax-gain harvesting should keep gains untaxed, so that when the time comes for other things, it will be easy to sell it. I am not suggesting keeping this for 30-40 years in a taxable account.

Full disclosure: I don't own any FFNOX, but I had my daughter start her Roth IRA with a few shares of IJS at Fidelity when she had made less than $500 one year. Eventually, her Roth grew to more than the initial minimum investment for FFNOX, so I had her sell all her ETFs and buy FFNOX. An advantage of this was that she understood Target Retirement funds and index mutual funds when she started a 401(k) at her job.
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Re: Grandad gifted FAGIX in UTMA account

Post by RetiredAL » Sun Oct 08, 2017 3:04 pm

Along with the other fine responders, I agree with your tax harvesting thoughts relating to this existing gain. Going forward, I suggest harvesting gains up to the kiddie limits or any losses each year.

When my parents did custodial accounts for my kids, no thought was given towards future taxation, but the tax ramifications were not so tough, thus the Cap Gain Tax back then was not too bad. Under today's tax rules, a large accumulated gain would be taxed pretty hard.

I am in the first year of a UTMA for my grandson and in Dec each year I will harvest (gain to the limit or loss) and I expect to file tax forms for tracking. Currently the account only holds a single broad index ETF, which I will re-buy if a gain or swap to something else if a loss. I will slowly convert to a more moderately balanced portfolio starting in 10 years.

Also make sure you have a backup custodian listed on the account in case the primary can't perform the duties.

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Re: Grandad gifted FAGIX in UTMA account

Post by Majormajor78 » Sun Oct 08, 2017 3:34 pm

vinnydabody wrote:
Sun Oct 08, 2017 4:44 am
My son also has a 529 account that we set up (Illinois Bright Start Savings, which uses Vanguard for their index portfolios):
- $3251 Index Equity Portfolio (underlying funds Vanguard Total Stock Market Index Fund 56%, Vanguard Total International Stock Index Fund 36%, Vanguard REIT Index Fund 8%)
- $11,490 Index Moderate Age 9-10 (underlying funds Vanguard Total Stock Market Index Fund 36.0%, Vanguard Total International Stock Index Fund 19.0%, Vanguard Total Bond Market Index Fund 17.0%, Vanguard Short-Term Bond Index Fund 9.0%, Vanguard High-Yield Corporate Fund 5.0%, Vanguard Total International Bond Index Fund 5.0%, Vanguard REIT Index Fund 5.0%, Vanguard Short-Term Inflation-Protected Securities Index Fund 4.0%)

so I supposed I could work that into the total portfolio setup.
A couple of months ago Brightstart made some changes and you're now able to choose your own individual asset allocation. If you wanted to view the UTMA and 529's as part of a single portfolio you may consider going "a la carte" within Brightstart instead of selecting one of the moving age based glide paths.

They slightly lowered fee's too!
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CyclingDuo
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Re: Grandad gifted FAGIX in UTMA account

Post by CyclingDuo » Sun Oct 08, 2017 4:19 pm

livesoft wrote:
Sun Oct 08, 2017 1:15 pm
CyclingDuo wrote:
Sun Oct 08, 2017 12:52 pm
Our only beef with the FFNOX used to be the expense ratio for the fund, ...
The net expense ratio of FFNOX is 0.11%, and that includes the expenses of the underlying funds. So if that's your beef, I don't know what to say except that you have gone off the deep edge.
I believe you misinterpreted our beef. Look above and you will see that we said "our only beef with the FFNOX used to be...."

At the time we were choosing funds (a few of years ago at the end of 2014) to set up our children's Roth IRA's, FFNOX had a .22% - .24% ER fee. It has since lowered the fees - I believe it was last year in 2016 when Fidelity finally did this - for the fund to the current .11%. So our "beef" at that time led us to the iShares from the Wiki for the low fees and amount of money we were working with on that initial Roth IRA contribution year.

https://www.bogleheads.org/wiki/Three-fund_portfolio

No worries.

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Re: Grandad gifted FAGIX in UTMA account

Post by livesoft » Sun Oct 08, 2017 4:54 pm

Sorry!
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Re: Grandad gifted FAGIX in UTMA account

Post by celia » Sun Oct 08, 2017 5:15 pm

Vinny, Is there a reason you opened a UTMA account instead of just adding the money to the 529 where it can grow tax-free? Now it is not eligible to go there since it is your son's money, not yours. Or do you have other kids and the total of all the gifts, had they been given to you, would have been over the gift tax exclusion (currently $14,000)?

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Re: Grandad gifted FAGIX in UTMA account

Post by oldcomputerguy » Sun Oct 08, 2017 5:50 pm

Spirit Rider wrote:
Sun Oct 08, 2017 10:41 am
I didn't see it mentioned, but if Grandad will really get upset by this. The waiting period only applies to tax loss harvesting. With tax gain harvesting, you can sell a security one day and buy the exact same security the next day.
Not always. Last time I sold some VTSAX, I got a notification from Vanguard that I could not buy any shares for 30 days. Something about a round trip.
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Re: Grandad gifted FAGIX in UTMA account

Post by vinnydabody » Mon Oct 09, 2017 9:44 pm

celia wrote:
Sun Oct 08, 2017 5:15 pm
Vinny, Is there a reason you opened a UTMA account instead of just adding the money to the 529 where it can grow tax-free? Now it is not eligible to go there since it is your son's money, not yours. Or do you have other kids and the total of all the gifts, had they been given to you, would have been over the gift tax exclusion (currently $14,000)?
My dad is the one funding the accounts and wanted to do it in-kind with his existing Fidelity holdings. His money, his rules. :D

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Re: Grandad gifted FAGIX in UTMA account

Post by Spirit Rider » Mon Oct 09, 2017 11:32 pm

vinnydabody wrote:
Mon Oct 09, 2017 9:44 pm
celia wrote:
Sun Oct 08, 2017 5:15 pm
Vinny, Is there a reason you opened a UTMA account instead of just adding the money to the 529 where it can grow tax-free? Now it is not eligible to go there since it is your son's money, not yours. Or do you have other kids and the total of all the gifts, had they been given to you, would have been over the gift tax exclusion (currently $14,000)?
My dad is the one funding the accounts and wanted to do it in-kind with his existing Fidelity holdings. His money, his rules. :D
It makes absolute sense to gift appreciated shares. As long as the investment income from dividends and/or capital gains is below the minors standard deduction (2017 = $1,050*) and the amount taxed at the child's rate (2017 = $1,050), there will be no tax liability. *If the minor's earned income >= $1,050, you really only get $350 to apply against investment income.

So it is really important to see if your dad is really partial to funds he is contributing in-kind or just the fact they are appreciated securities. if it is the latter, you want to sell them immediately. This gives you other options other than FFNOX or another investment.

There is actually a way to get this money into a 529 plan where it can grow tax-free for qualified education expenses. This is the minor's money and has to remain so until they have control. However, it is possible to open a UTMA 529 account in the minor's name with you as custodian and transfer cash funds from the UTMA to the 529. Any security sales will be subject to the above paragraph, but if you were going to sell the securities anyways, you are already there.

Obviously there are some restrictions. With a UTMA 529 account, even though you are the custodian, you can not change the beneficiary. Only the beneficiary can do that after they have reached the age of termination. One final interesting fact is that a UTMA 529 account is considered an asset of the parents for FAFSA purposes. This is a far more favorable treatment than that of a UTMA of the student (5.64% vs. 20%).

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Re: Grandad gifted FAGIX in UTMA account

Post by vinnydabody » Wed Oct 11, 2017 8:48 pm

Spirit Rider wrote:
Mon Oct 09, 2017 11:32 pm
There is actually a way to get this money into a 529 plan where it can grow tax-free for qualified education expenses. This is the minor's money and has to remain so until they have control. However, it is possible to open a UTMA 529 account in the minor's name with you as custodian and transfer cash funds from the UTMA to the 529. Any security sales will be subject to the above paragraph, but if you were going to sell the securities anyways, you are already there.

Obviously there are some restrictions. With a UTMA 529 account, even though you are the custodian, you can not change the beneficiary. Only the beneficiary can do that after they have reached the age of termination. One final interesting fact is that a UTMA 529 account is considered an asset of the parents for FAFSA purposes. This is a far more favorable treatment than that of a UTMA of the student (5.64% vs. 20%).
That's a great nugget of information. One of my siblings has a 16-year old so I am going to let her know about the possibility of converting the UTMA to a UTMA 529.

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