Author Topic: Best Vehicle to Save for Niece/Nephew  (Read 850 times)

bridget

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Best Vehicle to Save for Niece/Nephew
« on: April 20, 2017, 02:11:12 PM »
I currently make way too much money - way more than anyone else in my family.  I want to start a college/other savings account for each of my nieces (my brother's daughter is about 8 months old, my sister's will be born in a few weeks).  I'm planning to contribute $1,000 each now, and another $1,000 per year on their birthdays until they turn 18.  I'd reevaluate if my siblings end up having tons of kids or if I switch to a lower-paying job. 

I'm planning to approach my brother and sister about this and ask what they prefer in terms of the mechanism.  Here are the options and the pros/cons I'm planning to present to them - if anyone thinks I'm missing something, I'd love to hear it.

1. If they already have or are planning to set up a college fund, they can give me the account number and I'll just contribute to it.  If they do, I think this would be my first choice, since they're the parents and all.
2. I can set up a custodial account.  Pros: the money irrevocably belongs to my nieces (so if something unexpected happened, like if I died or went bankrupt or got divorced or had a judgment levied against me, it would be theirs without many complications), and they can use it on expenses other than college if it turns out that would be more useful to them (car, housing, summer camp, what have you).  Con:  It would count heavily against them for financial aid purposes.
3. 529 account.  Pros: doesn't weigh as heavily against them for financial aid purposes (so I hear), I might get some sort of tax break out of it (but probably not, based on my quick googling about California state tax breaks).  Cons: a bunch of strings attached about what they can use the money for. 
4.  I just set up a separate investment account in my own name that I personally earmark for their use.  Pros: It won't count against them at all for financial aid purposes.  Cons:  The money is technically my asset, and therefore subject to any unexpected events that happen in my life listed (pro from option #2), if it's in excess of the taxable gift threshold when they turn 18 (which is likely), I'd have to either divvy it up over multiple years or pay tuition directly or something like that, which adds a layer of complication. 

What does everyone think?   

Gin1984

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Re: Best Vehicle to Save for Niece/Nephew
« Reply #1 on: April 20, 2017, 02:13:37 PM »
There is also a educational IRA which can be used for educational use, like high school tuition, tutoring, applications etc as well as college.  It has a $2000 cap but if you are only doing $1000/kid, that may work.

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CNM

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Re: Best Vehicle to Save for Niece/Nephew
« Reply #2 on: April 20, 2017, 02:14:26 PM »
Excuse my ignorance, but what is the difference between a college fund and a 529?  I always assume that college funds are 529s because I am not aware of another education-specific vehicle available.


bridget

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Re: Best Vehicle to Save for Niece/Nephew
« Reply #3 on: April 20, 2017, 02:17:44 PM »
Excuse my ignorance, but what is the difference between a college fund and a 529?  I always assume that college funds are 529s because I am not aware of another education-specific vehicle available.

A 529 is a specific type of college fund that often has state tax credits or other benefits baked in to encourage people to save for college.  I think of the word "college fund" to just mean any way that one saves for college - it could be a savings account, 529, regular investment account, cash buried in the backyard, etc.  Sort of like how "retirement savings" is a broad term, and there are specific types (401(k), IRA, gold bricks hidden in the drywall).   

bridget

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Re: Best Vehicle to Save for Niece/Nephew
« Reply #4 on: April 20, 2017, 02:23:20 PM »
There is also a educational IRA which can be used for educational use, like high school tuition, tutoring, applications etc as well as college.  It has a $2000 cap but if you are only doing $1000/kid, that may work.

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Thanks, I hadn't heard of that!  It looks like there is an income limit though, and I'm over it, so it won't work for me.  I suppose I could tell my siblings to open one and then I could give them cash for the purpose of contributing it, but that seems complicated.  Plus, although I trust my siblings, I'm not sure I'm interested in an option that is basically just giving them a check for $1,000 per year and saying "please put this toward Wilhelmina's future."  My brother is often strapped for cash (mostly due to what I consider to be silly decisions his wife makes), and I could see him just using the money for some short-term thing and rationalizing it by saying he'll probably make more money later and will make up for it then.  He's a short-term thinker like that, and kind of just assumes that eventually they'll be inadvertently rich, or something.

Heroes821

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Re: Best Vehicle to Save for Niece/Nephew
« Reply #5 on: April 20, 2017, 02:28:07 PM »
I am working on something similar for my niece.  I would definitely talk to your sibling.  There are several times you'll need the child's social and it's good to know that they know you are doing it.  My brother probably won't get around to doing anything like that soon or ever and I want to do it anyway.  Currently it's just a savings account, but a 529 is a good way to go too. 

WoodStache

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Re: Best Vehicle to Save for Niece/Nephew
« Reply #6 on: April 20, 2017, 02:41:12 PM »
I'd think about doing something in your name. You can protect the money in the event of your death through language in your will that wouldn't need updating every time another kid is born.

I say this because, as you say, you don't know what the future holds. To me it wouldn't seem fair to give 12k to Billy, 10k to Jane and 0 to Julie because you quit your job or whatever. Obviously inequities might happen, but this would mitigate them.

Also, as much as I love and trust my siblings and their children, unless it was small gifts I would want to retain control. What if you don't agree with the some serious choices being made in the future? If you contribute to a 529 that the parents control, what's to stop them from taking the 10% penalty and withdrawing the money for themselves?

I say this as someone with very good to great relationships with all of my siblings, too.

CNM

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Re: Best Vehicle to Save for Niece/Nephew
« Reply #7 on: April 20, 2017, 02:48:48 PM »
Could you set up a trust account for them?  You'd still be in control and you can put parameters on it for how and when they can access the money.  It'd probably count toward their financial aid assets though.  But you'd be in control and you wouldn't necessarily need to tell the parents about it. 

GizmoTX

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Re: Best Vehicle to Save for Niece/Nephew
« Reply #8 on: April 20, 2017, 02:49:17 PM »
What happens if your niece or nephew doesn't attend college? Do they still get the money? What about vocational training?

We set up an educational trust for each nephew when they were almost 3 with $5k each, invested in tax friendly low fee indexed funds. 529s didn't exist. As trustee, I retained control. Each trust had its own tax ID (no need for nephew SSN) & paid any taxes at its own rate, not ours. Nephew A received $20k in paid college tuition after tax. Nephew B is unlikely to finish college & his trust is currently worth 23k with appreciation; he will receive the trust balance when he is 30, 5 years from now. For niece C, we used our own funds to send $2500 per semester directly to her university for 8 semesters, contingent upon her earning a B average.

We didn't want any beneficiary to obtain ownership of the funds at age 18, so no custodial, UGMA, or UTMA accounts. We didn't want parents to have access either -- stuff happens. Tuition payments went directly to the institution for the benefit of the student.

Mezzie

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Re: Best Vehicle to Save for Niece/Nephew
« Reply #9 on: April 20, 2017, 02:56:29 PM »
I'm in the same boat (well, without as much spare money), and I think I've narrowed it down to a 529 temporarily in my name that I can change the beneficiary of as each kid goes to school without messing up what their parents have to report on the FASFA or Ibonds that appear to have some tax benefits for educational expenses.

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bridget

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Re: Best Vehicle to Save for Niece/Nephew
« Reply #10 on: April 20, 2017, 03:46:23 PM »
What happens if your niece or nephew doesn't attend college? Do they still get the money? What about vocational training?

We set up an educational trust for each nephew when they were almost 3 with $5k each, invested in tax friendly low fee indexed funds. 529s didn't exist. As trustee, I retained control. Each trust had its own tax ID (no need for nephew SSN) & paid any taxes at its own rate, not ours. Nephew A received $20k in paid college tuition after tax. Nephew B is unlikely to finish college & his trust is currently worth 23k with appreciation; he will receive the trust balance when he is 30, 5 years from now. For niece C, we used our own funds to send $2500 per semester directly to her university for 8 semesters, contingent upon her earning a B average.

We didn't want any beneficiary to obtain ownership of the funds at age 18, so no custodial, UGMA, or UTMA accounts. We didn't want parents to have access either -- stuff happens. Tuition payments went directly to the institution for the benefit of the student.

For your first question, my understanding is that with a 529, if it isn't used for educational expenses, I could change the beneficiary name to another person to pay for their educational expenses.  I'm assuming a lot of traditional vocational stuff would count as educational, but I'm not 100% sure and it could also be subject to change.  That's part of why I'm leaning away from a 529 - I'd want them to have the flexibility to use the cash on something else, since I can't see the future and maybe tuition wouldn't be the best use of the money. 

What benefit did you see with a trust over a custodial account?  It seems to be pretty similar, except for the fact that one can set the age higher than 18.  Setting up a trust (or even a more-than-totally-standard will) seems unnecessarily complicated to me because in the scheme of things, this really isn't that much money.  If I were already doing some estate planning, I might throw one in, but this doesn't seem like a big enough deal to bother with trusts.  (FWIW, I'm a lawyer, and it still seems like a huge pain compared to just opening a couple of vanguard accounts online).


With respect to WoodStache's comment - even if a job changes, I'd do what is necessary to keep parity between my nieces and nephews.  That might mean stopping paying into Niece 1's account (which started earliest) if I can't afford to contribute to all of them, until all of the other accounts had equal contributions.  Equal distributions is sort of up to the whims of the market, I can't time that. 

The only thing I don't trust my siblings (mostly my brother) about is that they won't just use easy cash today and half-heartedly promise in their head that they'll put it back sometime when things are less tight.  That's more wishful thinking than anything else.  On everything else, I trust them to do what's best for their kid(s).  I certainly trust them not to manipulate an 18 year old out of her money,

I am philosophically in support of an 18 year old learning the lesson of managing a moderate chunk of cash.  Hopefully she would make good decisions, and if she doesn't, well ... it's her money, and hopefully she learns some valuable lessons.  I feel like my parents created this scarcity mindset in us, and all of their financial lessons were about how to manage on a shoestring (which was definitely a good lesson).  But there's also another lesson of how to responsibly handle a measure of wealth.  Being handed $20,000 or so as an 18 year old is enough money that it can be a really helpful jump start to life, but also not a ton of money in the scheme of things, so that if they piss it away I won't really be that upset about it.  I'd do my best as an aunt to instill some financial responsibility in them as well.

bridget

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Re: Best Vehicle to Save for Niece/Nephew
« Reply #11 on: May 28, 2017, 10:06:09 AM »
Update - I talked to my siblings and after giving them an overview of the options, both picked 529s. I live in California so I can't get a tax deduction for my contributions, so I set up 529s in their state so they can get a deduction if they choose to contribute. They both preferred I set up the 529 as the owner and they could contribute so they wouldn't have to figure out funds, keep track of it, etc. they are set up as secondary owners if I die, and have read only access so they can log in and will get quarterly statements. I put in an initial contribution of $1,000 for each niece and am planning to add the same amount for each birthday (but did not tell my siblings any particular planned dollar amounts, in case my situation changes).

yourusernamehere

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Re: Best Vehicle to Save for Niece/Nephew
« Reply #12 on: May 28, 2017, 04:57:19 PM »
Very thoughtful and generous of you, bridget. Glad you found an option you like.

GizmoTX

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Re: Best Vehicle to Save for Niece/Nephew
« Reply #13 on: May 28, 2017, 06:55:47 PM »
Absolutely I don't want beneficiaries getting control at age 18 -- it's too much of a temptation to be a disincentive. We're seeing that exact scenario with a nephew, who now has 100K from grandparents, is 25, & is unwilling to work or continue his studies. He has no idea how much he is hurting his future self.

bridget

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Re: Best Vehicle to Save for Niece/Nephew
« Reply #14 on: May 29, 2017, 11:09:15 AM »
Absolutely I don't want beneficiaries getting control at age 18 -- it's too much of a temptation to be a disincentive. We're seeing that exact scenario with a nephew, who now has 100K from grandparents, is 25, & is unwilling to work or continue his studies. He has no idea how much he is hurting his future self.

Interesting. I think it would be an interesting parenting gamble - you bet yourself say, $20,000 that you will successfully raise a responsible 18-year-old (much harder to do than raising a kid who gets the hang of responsibility a few years later). I think I'd give that experiment a try with a custodial account, but of course I shouldn't make that call for other people's kids.

Rubic

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Re: Best Vehicle to Save for Niece/Nephew
« Reply #15 on: May 29, 2017, 02:17:08 PM »
OP:  Beyond the 529, you might later consider some form of IRA "matching", which
is what I'm doing for my 6 nieces and nephews.  I'm currently matching up to $1000
per child per year, but may later increase that amount.  I feel like this approach gives
them some incentive to have some skin in the game and encourage them to think
about savings and investments.

Some of them aren't old enough to earn income yet, so I'm tracking my contributions
in a spreadsheet to ensure everyone will receive the same amount of matching funds.

bridget

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Re: Best Vehicle to Save for Niece/Nephew
« Reply #16 on: May 29, 2017, 05:40:21 PM »
OP:  Beyond the 529, you might later consider some form of IRA "matching", which
is what I'm doing for my 6 nieces and nephews.  I'm currently matching up to $1000
per child per year, but may later increase that amount.  I feel like this approach gives
them some incentive to have some skin in the game and encourage them to think
about savings and investments.

Some of them aren't old enough to earn income yet, so I'm tracking my contributions
in a spreadsheet to ensure everyone will receive the same amount of matching funds.

Cool idea! Both are under 1 right now, but I'll keep that in mind in the future. When you say you try to keep matching funds equal, what do you mean? Seems like it could inherently get unequal because different kids might not contribute as much to the matching.

I suppose I could say I would contribute $1k per year flat, but would match up to another $500 if the kid put in the same amount. If kid #2 didn't contribute any of her own money, I'd end up giving a greater total amount to #1.

Rubic

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Re: Best Vehicle to Save for Niece/Nephew
« Reply #17 on: May 30, 2017, 07:04:54 AM »
Cool idea! Both are under 1 right now, but I'll keep that in mind in the
future. When you say you try to keep matching funds equal, what do
you mean? Seems like it could inherently get unequal because
different kids might not contribute as much to the matching.

One niece and one nephew are too young to earn any money -- even
money for baby sitting, lawn work, etc.  I'm tracking the amounts I
contribute to their cousins so everyone can eventually reach parity
(i.e. I'll match amounts larger than $1000 until they catch up).

Quote
I suppose I could say I would contribute $1k per year flat, but would match
up to another $500 if the kid put in the same amount. If kid #2 didn't contribute
any of her own money, I'd end up giving a greater total amount to #1.

My contributions are predicated on a match to incentivize them to
develop good savings and investment habits.   It's "free money",
but as mentioned above, I think it's necessary for them to have
skin in the game. 

They're all listed as beneficiaries in my will, but I fear the effect
of a lump sum windfall if they haven't developed good finance
habits.  During my contribution phase (their accumulation phase)
I'm hoping that sibling competitiveness will encourage them not
to miss out on Uncle Rubic's match opportunity.