Account For Nieces

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colemanst13
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Account For Nieces

Post by colemanst13 » Tue May 14, 2019 12:47 pm

I've been an avid reader of the forum for a couple years now. As for myself, I am completely debt free. I am maxing out my 401k and also contributing to a taxable account, all using the 3 fund portfolio concept. Right now, I am looking to open custodial accounts for my nieces. I'm trying to figure out the best type of account to open. I tried to phone Vanguard and they really couldn't give me any direct answers.

My nieces are 5 and 2. My brother already has 529's for them and is contributing to those account each month. I'm looking to give them a head-start in life that we never had. Could you Bogleheads throw some knowledge my way???

alex_686
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Re: Account For Nieces

Post by alex_686 » Tue May 14, 2019 12:57 pm

This is a tough and complex question.

The obvious choice would be to open a UTMA in their name. Nice and clean. A few problems. Its their money, so that limits flexibility. They get full control of that money when they become of age - which varies by state but let us say 18. So in theory they could blow it on a fast car, drugs, or whatnot. It counts against any college aid they might receive. etc.

Despite these downsides I am in favor of this. I personally think that ownership, agency, and responsibility are linked. If you want them to grow up as responsible adults you have to give them responsibility, even it this means they fail from time to time. Opinions differ.

Other options are more complex running from trusts to scheduled ad hoc gifts to them.

NotWhoYouThink
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Re: Account For Nieces

Post by NotWhoYouThink » Tue May 14, 2019 1:09 pm

Why would you open custodial accounts rather than contributing to custodial accounts owned by their parents? Do you not agree with their parents on what access they should have to money? Are you willing to go against their wishes, and deal with the consequences?

J295
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Re: Account For Nieces

Post by J295 » Tue May 14, 2019 1:18 pm

In our family we choose to have the accounts remain in the name of the person intending to make the gifts rather than the child so that if the child applies for financial aid they will not need to list these funds as part of their assets.

Topic Author
colemanst13
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Re: Account For Nieces

Post by colemanst13 » Tue May 14, 2019 1:29 pm

Thank you for the responses so far. They've already helped. I am starting my initial investigation into this. I haven't made any decisions as far as which avenue to pursue. My only concern about keeping the funds in my name and then giving "gifts" is the annual limitation. What do you do if you want to give in excess of the allowable amount?

Thank you for your responses

NotWhoYouThink
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Re: Account For Nieces

Post by NotWhoYouThink » Tue May 14, 2019 1:47 pm

There is no maximum allowed amount. If you give over $15k per year per recipient you have to fill out a form. Until you have given $11.2M there are no tax consequences. But you could give more than that.

aristotelian
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Re: Account For Nieces

Post by aristotelian » Tue May 14, 2019 1:48 pm

There is very little tax benefit now to UTMA accounts, while gift tax has effectively been eliminated. If you do not want to earmark the funds for college, I would just save in a brokerage account. That gives you maximum control and flexibility. Then when they are determined to be ready and responsible, you can start giving them up to $15K annually with no reporting.

Broken Man 1999
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Re: Account For Nieces

Post by Broken Man 1999 » Tue May 14, 2019 1:57 pm

NotWhoYouThink wrote:
Tue May 14, 2019 1:09 pm
Why would you open custodial accounts rather than contributing to custodial accounts owned by their parents? Do you not agree with their parents on what access they should have to money? Are you willing to go against their wishes, and deal with the consequences?
If I'm doing the giving, I would want to be in control.

Family hits a tough stretch, raids the child's 529 plan.
Parents get divorced, raid the child's 529 plan.
A parent dies, other gets remarried, and new spouse convinces spouse to raid the child's 529 plan, or to share it with new couple's kids.

Most likely none of this would happen. But I see no reason to have such options even made available.

As well, in some states one can get tax credits for contributing to such accounts.

So, me, I would certainly keep it in my control as long as possible. Things change, life happens, family dynamics change. And, in fact that is what I am doing for our own grandchildren, I own the plans.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

Grt2bOutdoors
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Re: Account For Nieces

Post by Grt2bOutdoors » Tue May 14, 2019 2:03 pm

colemanst13 wrote:
Tue May 14, 2019 1:29 pm
Thank you for the responses so far. They've already helped. I am starting my initial investigation into this. I haven't made any decisions as far as which avenue to pursue. My only concern about keeping the funds in my name and then giving "gifts" is the annual limitation. What do you do if you want to give in excess of the allowable amount?

Thank you for your responses
If you are giving gifts in excess of the annual limitation (currently $15K) and not using a 529 plan, then a trust account may be a preferable option. There you are having a legal document created that stipulates the necessary requirements before monies can be withdrawn and at what age said individual obtains full control of the account (if ever). You will/should work with an attorney to create such a document if/when you decide to pursue such a vehicle.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

tampaite
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Re: Account For Nieces

Post by tampaite » Tue May 14, 2019 2:08 pm

colemanst13 wrote:
Tue May 14, 2019 12:47 pm
As for myself, I am completely debt free. I am maxing out my 401k and also contributing to a taxable account.
Right now, I am looking to open custodial accounts for my nieces.

My nieces are 5 and 2.
Since you want control, open two more taxable accounts and call it Niece5 and Niece2 and contribute to it and then turn over the proceeds to them when they turn 30

Silence Dogood
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Re: Account For Nieces

Post by Silence Dogood » Tue May 14, 2019 2:08 pm

I don't have any nieces/nephews yet, but I hope I will someday.

It appears that your nieces' college education will be paid for? If not, why not make a contribution to their already existing 529 plan?

Otherwise, why not keep the money invested for yourself, for now, and gift them things and experiences as they grow older?

Their needs and wants will likely change over time.

For example, as they get older you can gift them books, toys, paid-for summer camp, music lessons, etc.

I have an uncle who gifted me and my siblings: a SNES, a ping-pong table, a piano keyboard, summer visits to his lake house, etc. Those gifts made our childhoods better.

You only get to experience childhood once.

RetiredAL
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Re: Account For Nieces

Post by RetiredAL » Tue May 14, 2019 2:53 pm

aristotelian wrote:
Tue May 14, 2019 1:48 pm
There is very little tax benefit now to UTMA accounts, while gift tax has effectively been eliminated. If you do not want to earmark the funds for college, I would just save in a brokerage account. That gives you maximum control and flexibility. Then when they are determined to be ready and responsible, you can start giving them up to $15K annually with no reporting.
IMO, being able to tax gain harvest a UTMA for several thousand a year in gains with zero tax liability is a pretty decent tax benefit.

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celia
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Re: Account For Nieces

Post by celia » Tue May 14, 2019 3:01 pm

Please, please, PLEASE don't open accounts for them without their parents' buy-in. The taxable accounts will impact them having to file taxes and/or their parents' tax return. This could create extra headaches for them even though you have good intentions.

To keep things simple, it would be good to contribute to the 529s that have already been opened. If you think the parents will then contribute less or disagree with how the accounts are invested, then open up separate 529s for them. This assumes you live in the same state as their family since some states treat 529's differently than other states.

Kennedy
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Re: Account For Nieces

Post by Kennedy » Tue May 14, 2019 3:10 pm

Broken Man 1999 wrote:
Tue May 14, 2019 1:57 pm
NotWhoYouThink wrote:
Tue May 14, 2019 1:09 pm
Why would you open custodial accounts rather than contributing to custodial accounts owned by their parents? Do you not agree with their parents on what access they should have to money? Are you willing to go against their wishes, and deal with the consequences?
If I'm doing the giving, I would want to be in control.

Family hits a tough stretch, raids the child's 529 plan.
Parents get divorced, raid the child's 529 plan.
A parent dies, other gets remarried, and new spouse convinces spouse to raid the child's 529 plan, or to share it with new couple's kids.

Most likely none of this would happen. But I see no reason to have such options even made available.

As well, in some states one can get tax credits for contributing to such accounts.

So, me, I would certainly keep it in my control as long as possible. Things change, life happens, family dynamics change. And, in fact that is what I am doing for our own grandchildren, I own the plans.

Broken Man 1999
This very thing happened to me. I contributed some money to my nephews' 529 plans. Their mother had her name on the accounts with her children as the beneficiaries. The parents turned out to be terrible money managers and liquidated the 529 plans to pay for living expenses through the years, including the money I had contributed.

The older child ended up taking out loans for all of his college expenses, and the younger one was later diagnosed with a mental illness and never went to college or a trade school.

I am bitter that my sibling using the money for expenses unrelated to the children's education. Had I to do it over again, I would have maintained control over the money and paid for part of my nephew's education directly.

Silence Dogood
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Re: Account For Nieces

Post by Silence Dogood » Tue May 14, 2019 3:31 pm

OP, as you can see, giving them money may be more complicated than you originally imagined.

As I suggested above, I think the best idea is to gift your nieces throughout their life, as they grow older.

Want them to have fun? Buy them a Nintendo Switch and some games to go with it.

Want to help them learn something new? Buy them some books and a Raspberry Pi.

Take them on a trip. Pay for archery lessons. Buy them a telescope.. or an electric guitar.

You will be such a cool uncle! 8-)

alex_686
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Re: Account For Nieces

Post by alex_686 » Tue May 14, 2019 3:58 pm

So let me take the opposite side, advocating for a UTMA. Drop a modest amount in one. Wait 10 years. Show your niece the balance and growth when she is 15, a few years before she gets full control. See how she reacts, guide her questions, give het a long leash. Make it a leaning experience.

Broken Man 1999
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Re: Account For Nieces

Post by Broken Man 1999 » Tue May 14, 2019 4:06 pm

alex_686 wrote:
Tue May 14, 2019 3:58 pm
So let me take the opposite side, advocating for a UTMA. Drop a modest amount in one. Wait 10 years. Show your niece the balance and growth when she is 15, a few years before she gets full control. See how she reacts, guide her questions, give het a long leash. Make it a leaning experience.
Could work, might not work. She might blow it, or might act very responsibly.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

NotWhoYouThink
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Re: Account For Nieces

Post by NotWhoYouThink » Tue May 14, 2019 4:30 pm

Are you planning to open similar accounts for any and all future nieces and nephews?

If you choose to do this, you need to let your brother know, and if the contributions are anywhere near $15K each they will probably have to pay tax on the investment earnings eventually. That can be paid out of the UTMA account or someone else can pay it, but your brother/SIL will have to fill out and sign the forms.

As mentioned above, the money belongs to the nieces once they reach 18 or 21you make the gift, and they can control it when they reach 18 or 21. It may affect their financial aid eligibility, and then again it might make the difference between going to college or not.

If they or their future partners have drug problems, it may go to drugs and bail and attorneys. Or maybe they'll use the money to start a business and get rich before they are 30. You just don't know.

Grt2bOutdoors
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Re: Account For Nieces

Post by Grt2bOutdoors » Tue May 14, 2019 7:47 pm

Broken Man 1999 wrote:
Tue May 14, 2019 4:06 pm
alex_686 wrote:
Tue May 14, 2019 3:58 pm
So let me take the opposite side, advocating for a UTMA. Drop a modest amount in one. Wait 10 years. Show your niece the balance and growth when she is 15, a few years before she gets full control. See how she reacts, guide her questions, give het a long leash. Make it a leaning experience.
Could work, might not work. She might blow it, or might act very responsibly.

Broken Man 1999
See this money, says Uncle to Niece, this is the money that will be used to pay for your college.
Niece to uncle - that's so thoughtful of you Uncle. (peck on cheek), if there's any money left over in that account after paying for college, what happens to it?
Uncle to Niece - money left over in account will be used to help you go on vacation after graduation, buy your first gently used newer car, buy your first set of clothes for your job or profession, maybe you can save some of it for when you get married, have kids or buy a house.
Niece to Uncle - well, we can worry about that when the time comes, for now I need to get back to studying.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Topic Author
colemanst13
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Re: Account For Nieces

Post by colemanst13 » Tue May 14, 2019 9:26 pm

Thank you Bogleheads. Just as I thought: you all have given me more to think about than I originally anticipated. This string will give me a good foundation to do some more research. I truly appreciate all of your insights!!!

alex_686
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Re: Account For Nieces

Post by alex_686 » Wed May 15, 2019 10:36 am

Broken Man 1999 wrote:
Tue May 14, 2019 4:06 pm
alex_686 wrote:
Tue May 14, 2019 3:58 pm
So let me take the opposite side, advocating for a UTMA. Drop a modest amount in one. Wait 10 years. Show your niece the balance and growth when she is 15, a few years before she gets full control. See how she reacts, guide her questions, give het a long leash. Make it a leaning experience.
Could work, might not work. She might blow it, or might act very responsibly.

Broken Man 1999
So, a little more insight in my thinking.

I have know people who were pretty well insulated from making mistakes. Trust fund babies. Helicopter parents. etc.

On the other hand I know of people who were given authority and responsibilities, and were allowed to make mistakes and feel the real impact of them.

As a extreme example, there is one woman I know who lost 200k when she was 20 back in the 80s and had to declare bankruptcy. She is one of the happiest well adjusted people, and she credits the fact that she the 200k. Going through 200k taught her the value of money - namely that it was not that important - which might seem odd coming from a successfully banker. It is kind of odd - she admits that she wasted the money on parties and was foolish, but also she has no regrets because she has nobody to blame but herself and it made who she is today.

Obviously, a extreme example, but most of the people I respect had authority, agency, and responsibility at a young age. The nieces already seem to have a large chunk of their college education covered, so that obvious path has been taken care of. Now we turn to a more fundamental question - what is money for and how do we raise children. Which is harder and varies between children.

I would not drop a huge sum in a UTMA - but I would advocate dropping a modest amount.

RetiredAL
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Re: Account For Nieces

Post by RetiredAL » Wed May 15, 2019 12:40 pm

alex_686 wrote:
Wed May 15, 2019 10:36 am
Broken Man 1999 wrote:
Tue May 14, 2019 4:06 pm
alex_686 wrote:
Tue May 14, 2019 3:58 pm
So let me take the opposite side, advocating for a UTMA. Drop a modest amount in one. Wait 10 years. Show your niece the balance and growth when she is 15, a few years before she gets full control. See how she reacts, guide her questions, give het a long leash. Make it a leaning experience.
Could work, might not work. She might blow it, or might act very responsibly.

Broken Man 1999
So, a little more insight in my thinking.

I have know people who were pretty well insulated from making mistakes. Trust fund babies. Helicopter parents. etc.

On the other hand I know of people who were given authority and responsibilities, and were allowed to make mistakes and feel the real impact of them.

......
......
.......

I would not drop a huge sum in a UTMA - but I would advocate dropping a modest amount.
Alex, I concur with your logic. If they do not understand UTMA money at 18-21, or are into drugs, then there is a lot more problem out there than a few $.

My parents gift UTMA money to my kids, and later made me the trustee. Daughter used her's for college. Son #1 used his to support wife while she was in college. Son #2 did not go to 4 yr college, became a Wildland Fireman, and is in the process today of buying a house with $ that had been in his UTMA. All three are today are financially good, in part from knowledge gained from having an UTMA account.

As a side note about the growth over time. Son #2's account today holds Schwab SP500 mutual fund. $10,000 bought in 2003 is now worth $36,000.

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BL
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Re: Account For Nieces

Post by BL » Wed May 15, 2019 1:03 pm

Perhaps setting up 2 separate accounts with each as a beneficiary, would work. At some time in the future you could give the account to them, and they could sell and pay the tax when they chose to. Yes, you would pay tax until then, but a tax-efficient fund like Total Stock Market or S&P 500 wouldn't be too bad. You would maintain control and could even switch to UTMA, 529, etc. later, if desired.

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