Author Topic: I want to invest for my niece or nephew, how should I go about this?  (Read 3706 times)

Elle1989

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I have a niece/nephew on the way, and I want to start putting some money away for them once they're born. My brother and his girlfriend are young and financially irresponsible and I want to provide this kid with some financial help, instead of useless, quickly forgotten gifts. Obviously the 529 is the obvious choice, but I don't necessarily want to save for college -- I'd like it to be more flexible (available for college, biz start up costs, health costs, or just the start up costs of adulthood). Is there a good option for investing for someone who isn't your child that doesn't have to be used for college? I don't want the account in my brother's name. Any input is appreciated!

tonysemail

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Re: I want to invest for my niece or nephew, how should I go about this?
« Reply #1 on: June 23, 2016, 04:54:08 PM »
I think you're looking for a custodial brokerage account.
my in laws set one up for my kids.

There are a few things to be aware.
- If a minor's custodial account realizes too much investment income, then the minor needs to file a tax return or include a form in their parent's tax return.
- you can request a withdrawal to pay for things like summer camp
- it's available for college, but it's a bad option due to how it's counted for financial aid.  You can roll over the assets to a custodial 529 or just spend them down before college.
- the money is theirs at age 18.  they can withdraw it for any reason and you have no control over it at that age.

You can also buy an I-bond, although the interest rates are just awful right now.

mozar

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Re: I want to invest for my niece or nephew, how should I go about this?
« Reply #2 on: June 23, 2016, 05:33:32 PM »
My grandfather bought some mutual funds for me when I was 12. You just need the kids ss number and you can do a variety of things.

GizmoTX

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Re: I want to invest for my niece or nephew, how should I go about this?
« Reply #3 on: June 23, 2016, 06:32:10 PM »
We set up a revocable educational trust for each of our 2 nephews at age 2. We funded each with $5,000, invested it in index funds, & it grew to $20,000 by the time they graduated from high school. While the trust primarily provided for college or vocational training, any residual is paid to the beneficiary at age 30, which provides a later exit if he doesn't go. The trustee (me) retains control until the trust has ended. 529s didn't exist when we set this up, & the trusts weren't tax exempt, but the index funds were tax friendly. We certainly didn't want the funds paying taxes at our bracket.

rockstache

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Re: I want to invest for my niece or nephew, how should I go about this?
« Reply #4 on: June 23, 2016, 06:37:54 PM »
We set up a revocable educational trust for each of our 2 nephews at age 2. We funded each with $5,000, invested it in index funds, & it grew to $20,000 by the time they graduated from high school. While the trust primarily provided for college or vocational training, any residual is paid to the beneficiary at age 30, which provides a later exit if he doesn't go. The trustee (me) retains control until the trust has ended. 529s didn't exist when we set this up, & the trusts weren't tax exempt, but the index funds were tax friendly. We certainly didn't want the funds paying taxes at our bracket.
This is interesting to me. I'm in a similar situation to the OP but right now I have my niece/nephews money in a pathetic savings account because:

-vanguard only lets you have one beneficiary
-I don't want anyone (parents or kids) except my husband and I, to have access to the accounts until I think they're responsible enough.
-I'd like them to be in index funds
-I don't have huge starting amounts

Would you be willing to share more details about how you set this up and what the terms were?

GizmoTX

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Re: I want to invest for my niece or nephew, how should I go about this?
« Reply #5 on: June 23, 2016, 07:46:09 PM »
Each trust is about a 5 page document, identical except for the names. It specified the limited uses for the funds, namely post high school education, but could also be used for emergency health or welfare of the nephew in the sole discretion of the trustee. We signed it & filed it with the IRS, along with applying for a tax ID number for each trust. At the time, we needed to have the nephew's parents (my siblings) sign a simple document that they agreed to the trust accepting our gift rather than them for their minor child -- in reality, no agreement, no money. Then we funded each, using the trust title & ID number to style the index funds. Every year I filled out & filed a Form 1041 Income Tax for trusts, which wasn't hard to do. Since the trust was intended to retain annual earnings & appreciation, no K1 needed to be sent & the IRS considers this to be a "complex trust". The trust was required to pay taxes annually (quarterly if over a specified amount) but in our case this was either 15% or nothing if the gain came from appreciation rather than a distribution. I used two index funds: Vanguard Total Market Index Fund, and Dodge & Cox Stock Value Fund; both did well but Vanguard did better. The nephew did not have to pay any tax since the trust already did.

While an educational trust is considered an asset of the student, even though he cannot touch it, the fact that our trust language called for any residual to be held until age 30 if the beneficiary did not graduate from a 4 year university or equivalent vocational school should exclude most or all of it from the FAFSA. You will want to confirm this.

onlykelsey

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Re: I want to invest for my niece or nephew, how should I go about this?
« Reply #6 on: June 23, 2016, 07:49:05 PM »
Each trust is about a 5 page document, identical except for the names. It specified the limited uses for the funds, namely post high school education, but could also be used for emergency health or welfare of the nephew in the sole discretion of the trustee. We signed it & filed it with the IRS, along with applying for a tax ID number for each trust. At the time, we needed to have the nephew's parents (my siblings) sign a simple document that they agreed to the trust accepting our gift rather than them for their minor child -- in reality, no agreement, no money. Then we funded each, using the trust title & ID number to style the index funds. Every year I filled out & filed a Form 1041 Income Tax for trusts, which wasn't hard to do. Since the trust was intended to retain annual earnings & appreciation, no K1 needed to be sent & the IRS considers this to be a "complex trust". The trust was required to pay taxes annually (quarterly if over a specified amount) but in our case this was either 15% or nothing if the gain came from appreciation rather than a distribution. I used two index funds: Vanguard Total Market Index Fund, and Dodge & Cox Stock Value Fund; both did well but Vanguard did better. The nephew did not have to pay any tax since the trust already did.

While an educational trust is considered an asset of the student, even though he cannot touch it, the fact that our trust language called for any residual to be held until age 30 if the beneficiary did not graduate from a 4 year university or equivalent vocational school should exclude most or all of it from the FAFSA. You will want to confirm this.

Gizmo, thanks so much for this.  I am pregnant now and despite being an attorney (in an unrelated field) have zero idea how any of this works.  Great explanation.

rockstache

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Re: I want to invest for my niece or nephew, how should I go about this?
« Reply #7 on: June 23, 2016, 08:10:53 PM »
Each trust is about a 5 page document, identical except for the names. It specified the limited uses for the funds, namely post high school education, but could also be used for emergency health or welfare of the nephew in the sole discretion of the trustee. We signed it & filed it with the IRS, along with applying for a tax ID number for each trust. At the time, we needed to have the nephew's parents (my siblings) sign a simple document that they agreed to the trust accepting our gift rather than them for their minor child -- in reality, no agreement, no money. Then we funded each, using the trust title & ID number to style the index funds. Every year I filled out & filed a Form 1041 Income Tax for trusts, which wasn't hard to do. Since the trust was intended to retain annual earnings & appreciation, no K1 needed to be sent & the IRS considers this to be a "complex trust". The trust was required to pay taxes annually (quarterly if over a specified amount) but in our case this was either 15% or nothing if the gain came from appreciation rather than a distribution. I used two index funds: Vanguard Total Market Index Fund, and Dodge & Cox Stock Value Fund; both did well but Vanguard did better. The nephew did not have to pay any tax since the trust already did.

While an educational trust is considered an asset of the student, even though he cannot touch it, the fact that our trust language called for any residual to be held until age 30 if the beneficiary did not graduate from a 4 year university or equivalent vocational school should exclude most or all of it from the FAFSA. You will want to confirm this.

Gizmo, thanks so much for this.  I am pregnant now and despite being an attorney (in an unrelated field) have zero idea how any of this works.  Great explanation.
+1 (except for the attorney bit). Thank you so much!