Gifts to a minor: UTMA, 529, or parent held brokerage

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Topic Author
redmaw
Posts: 68
Joined: Mon Apr 22, 2019 7:20 am

Gifts to a minor: UTMA, 529, or parent held brokerage

Post by redmaw » Thu Jul 30, 2020 11:05 am

A relative asked me recently, about setting up a brokerage account for my soon to be 3 year old so that he could gift him some funds (maybe $100) to be invested. The main point would be providing funds that are his to eventually show him how investments work, and the power of long term growth. In general I like this idea, but I'm not very familiar with the advantages or disadvantages of each account type.

At this point I am leaning towards opening a new brokerage account in my name, putting any gifted funds into it, and eventually gifting him the balance. I don't think the balance will ever be very large, and I could always split the years on the gifting so I am not worried about gift tax becoming an issue. I'm also not particularly worried about taxes on gains... I don't foresee leaving the 0% bracket, and any non-qualified dividends it throws off should have a negligible effect on my taxes.

I also know there are UTMA accounts, where the child is the owner, but it would be controlled by me (or in this case my brother could control it I guess) until he's old enough. Based on my quick read on this, it may be a complexity I don't need, as the only advantage I see with this route is gains being taxed at kiddie tax rates. This isn't much of an advantage to me based on the 0% cap gains/qualified dividend bracket, and we aren't talking about a large balance.

I also considered opening a 529 plan as I understand these are set up to easily accept outside gifts, but there seem to be come issues. First I am in Pa, and my brother is in Ohio, so I am not sure if I can actually get a single 529 that would be tax deductible to both of us. Without that deduction, a 529 just seems like a bunch of hoops to jump through to avoid cap gains, which I'm likely to get at 0% anyway. Besides that the 1 plan i looked at (pa's) did not really allow much selection in investments beyond stock/bond split, and I couldn't easily find any discussion of fees or expense ratios.

So what am I missing? Do the UTMA or 529 plan deserve another look?

lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Gifts to a minor: UTMA, 529, or parent held brokerage

Post by lakpr » Thu Jul 30, 2020 12:22 pm

I would definitely consider UTMA accounts, since the money flow direction will be one-way (only in, not out, not unless you want to show that you spent that money on the kids' benefit that is NOT a parental responsibility). Being a separate account it provides a clear delineation of what is the kids' money and what is your money.

Pulling money out of the UTMA account and saying you spent it on food and clothing for your kid, for example, is not going to fly. Feeding and clothing is supposed to be your parental responsibility.

Pulling money you "mentally earmarked" for your kid's benefit for feeding and clothing your child, no one would bat an eyelid. It's your money, how you choose to spend it is your privilege. It was never the kid's benefit.

The 529 plan also provides such clear delineation of what is kid's money -- but with a carrot and a stick. Carrot being, all gains are tax-free if spent for education. Stick being a 10% penalty and YOUR marginal income tax rate on the gains, if you pull out the money for any other expenses.

=============
TL DR: I favor UTMA or 529 accounts, to keep the kid's money separate and no questions to be raised or answered later on.

brad.clarkston
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Location: Kansas City, MO

Re: Gifts to a minor: UTMA, 529, or parent held brokerage

Post by brad.clarkston » Thu Jul 30, 2020 9:59 pm

I would go with the 529 as it can be used also used for future kids as long as someone is putting money in it.

classicindexer
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Re: Gifts to a minor: UTMA, 529, or parent held brokerage

Post by classicindexer » Thu Jul 30, 2020 10:08 pm

We have both a UTMA and a 529 for our son. UTMA is for cash or checks given to him instead of it going in our checking or brokerage accounts. Family/friends can also contribute to the 529 electronically or via check.

I ended up choosing a UTMA instead of a dedicated savings account so that we can invest the money in VTI / VXUS. I plan to teach him the Bogleheads ways and I can do that easier with a UTMA over a 529 since we have free ETF/stock trades at Fidelity. Plus if I want to teach him about buying single stocks (we don't own any), I can use the UTMA (can't do that in a 529).

mega317
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Re: Gifts to a minor: UTMA, 529, or parent held brokerage

Post by mega317 » Thu Jul 30, 2020 10:17 pm

My opinion is that a gift to the child is not your money and should not go into your account.

(It is also my opinion that you can’t teach someone about equity investing by buying them equities given the relevant time frames.)
https://www.bogleheads.org/forum/viewtopic.php?t=6212

RetiredCSProf
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Re: Gifts to a minor: UTMA, 529, or parent held brokerage

Post by RetiredCSProf » Thu Jul 30, 2020 11:15 pm

When my son was young, I invested in all three.

1) UTMA savings account. My FA, at the time, recommended that I withdraw most of the savings in this account before filling out financial aid package for college -- having assets in student's account is more heavily weighed than assets in parent's account when applying for financial aid. As it turned it, my son was offered only loans, anyway.

2) The brokerage account (also a UTMA) turned out to be problematic. I chose a MF in technology -- just before the tech bubble burst. The account has never recovered to my initial investment. With my son having no income yet, there has been no way for him to take advantage of a loss on selling it.

3) 529 fund -- best decision I made

rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: Gifts to a minor: UTMA, 529, or parent held brokerage

Post by rkhusky » Fri Jul 31, 2020 10:03 am

My kids give me their money, which I keep track of and pay above-market rates. When they want to buy something, they make a withdrawal. Truly bank-of-dad. Contributions to a 529 are from my money.

Topic Author
redmaw
Posts: 68
Joined: Mon Apr 22, 2019 7:20 am

Re: Gifts to a minor: UTMA, 529, or parent held brokerage

Post by redmaw » Fri Jul 31, 2020 8:34 pm

lakpr wrote:
Thu Jul 30, 2020 12:22 pm
I would definitely consider UTMA accounts, since the money flow direction will be one-way (only in, not out, not unless you want to show that you spent that money on the kids' benefit that is NOT a parental responsibility). Being a separate account it provides a clear delineation of what is the kids' money and what is your money.
This is interesting perspective, but I have a hard time seeing restrictions on the use of funds as an advantage. I have plenty of sources of money, and don't think i would ever be tempted to dip into the account whether in my name or not. I intend to have a separate account, but I can do that in my name as well, and still provide more than adequate separation of funds.
mega317 wrote:
Thu Jul 30, 2020 10:17 pm
My opinion is that a gift to the child is not your money and should not go into your account.

(It is also my opinion that you can’t teach someone about equity investing by buying them equities given the relevant time frames.)
I see no reason my son's assets can't be held in an account in my name, it would be clear that its his account in everyway other than name. I see it as no different than when I bought my first car at 16 with money I saved from summer jobs, but it got titled in my dad's name because I wasn't old enough. It was still my car.

I'm interested in a better way to teach someone about equities (really investing at all). I don't expect him to be an expert at 18, but he'll be a ways ahead of where I was.
RetiredCSProf wrote:
Thu Jul 30, 2020 11:15 pm
2) The brokerage account (also a UTMA) turned out to be problematic. I chose a MF in technology -- just before the tech bubble burst. The account has never recovered to my initial investment. With my son having no income yet, there has been no way for him to take advantage of a loss on selling it.
This actually sounds like a really valuable lesson, and if it's made with small amounts early on, it could avert real disaster later.


As a separate question, if I set up an utma account, would I have to start filing taxes for him immediately, or only if he hit an income limit?

babystep
Posts: 213
Joined: Tue Apr 09, 2019 9:44 am

Re: Gifts to a minor: UTMA, 529, or parent held brokerage

Post by babystep » Fri Jul 31, 2020 11:08 pm

redmaw wrote:
Thu Jul 30, 2020 11:05 am
A relative asked me recently, about setting up a brokerage account for my soon to be 3 year old so that he could gift him some funds (maybe $100) to be invested. The main point would be providing funds that are his to eventually show him how investments work, and the power of long term growth. In general I like this idea, but I'm not very familiar with the advantages or disadvantages of each account type.

At this point I am leaning towards opening a new brokerage account in my name, putting any gifted funds into it, and eventually gifting him the balance. I don't think the balance will ever be very large, and I could always split the years on the gifting so I am not worried about gift tax becoming an issue. I'm also not particularly worried about taxes on gains... I don't foresee leaving the 0% bracket, and any non-qualified dividends it throws off should have a negligible effect on my taxes.

I also know there are UTMA accounts, where the child is the owner, but it would be controlled by me (or in this case my brother could control it I guess) until he's old enough. Based on my quick read on this, it may be a complexity I don't need, as the only advantage I see with this route is gains being taxed at kiddie tax rates. This isn't much of an advantage to me based on the 0% cap gains/qualified dividend bracket, and we aren't talking about a large balance.

I also considered opening a 529 plan as I understand these are set up to easily accept outside gifts, but there seem to be come issues. First I am in Pa, and my brother is in Ohio, so I am not sure if I can actually get a single 529 that would be tax deductible to both of us. Without that deduction, a 529 just seems like a bunch of hoops to jump through to avoid cap gains, which I'm likely to get at 0% anyway. Besides that the 1 plan i looked at (pa's) did not really allow much selection in investments beyond stock/bond split, and I couldn't easily find any discussion of fees or expense ratios.

So what am I missing? Do the UTMA or 529 plan deserve another look?
529 and UTMA accounts are two totally different types of accounts for specific purposes: education vs transfer of assets to a minor.

If you haven't checked then please see
https://www.bogleheads.org/wiki/529_plan
https://www.bogleheads.org/wiki/Uniform ... Minors_Act

When 529 funds are used for education then all the growth is generally free from taxes but can't use for other purposes.
UTMA tax rules are quite complicated but think of this as about 2k in qualified dividends/gains as tax-free but anything above is taxed at parents rate.

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