A gift to my kids who aren't born yet

glavinsoloJanuary 16, 2007

Long time lurker, first time poster to this financial forum.

I am getting married in June. We plan to have kids 2-3 years from now. My fiancee and I agreed to set up accounts for our kids the day they are born to give them when they get married or when they graduate college. These accounts are not to pay for their weddings or costs associated college. They are just going to be there for them to help them start their lives.

So let's say we place $5000 in an account when the baby is born. Should I put it under the baby's SSN#? What would be most advantageous for a 21-22 year account gaining interest?

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Here's a website with a suggestion for how to set up a charitable trust in the child's name. I'm not saying that this is what you should do -- but maybe it might give you some ideas.

Here is a link that might be useful: Turning $10,000 into $20 million

    Bookmark   January 16, 2007 at 12:40PM
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When you put assets in the name of children, whether it's the kind of account you're thinking of or funding for college, there's a catch. Be aware that when colleges look at your children and consider giving them financial aid, money that's held in their names has a hugely disproportionate negative impact on their ability to get assistance. If the same amount is part of the parent's assets, the impact is much, much smaller.

There are certain tax advantages that occur when you do establish accounts in a minor's name, such as him/her being in a lower tax bracket. But I decided to keep the assets for my kids in my name, and it definitely made a difference in what the schools offered. How do I know this? Because I know exactly how the complicated financial aid models work and have crunched the numbers myself.

I'm not saying that you should do what I did...just that you should talk to a financial planner before you irrevocably put assets in your children's names (and then find out 15 years later that it wasn't the best choice). You're doing a good thing. Just make sure you know all the implications.

    Bookmark   January 16, 2007 at 7:33PM
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also--if you put the money in the child's name, it becomes his/hers, and you aren't supposed to use it for your own purposes. What if disaster strikes your family, and you decide you need that money? You aren't supposed to touch it.

I know many years ago, my in-laws used the money in their son's (my DH's) savings account as part of the downpayment on the family home. They were able over the years to replace that money for him--but I cannot do that with my children's savings accounts.

I couldn't even use that money to pay for surgery for THEM (since their medical care, since they are minors, is MY responsibility). At least, that's the way I understand it.

And you can't even decide it was a mistake, and transfer the money back to yourself.

So, your family might have better flexibility if you make it a joint account, or simply put it in your own name, even if it's a separate account from your regular one.

    Bookmark   January 17, 2007 at 10:25AM
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I am a firm believer in making sure that the money is NOT in the childrens's name. Once the money is in their name and they come of age, they can do whatever they want to do with it. They can go to Europe, buy drugs, buy a car, buy the next Microsoft stock or what not. Legally, you have NO say in the matter. If you do not want them to have the control of the money without your approval, you need to set up a "trust" of some sort with designated stipulation of the trust. This is expensive because of the fees involved in it even if you are the trustee plus the money is absolutely tied up, even in cases of emergencies. Most people do not have enough money to set up a trust and make it worth while. If you are still interested, you should consult an attorney.

You can still set up a separate account with your name on the account and put the money aside. When the time comes, give the children money to help them start out. Many people I know have had a "nice" gift from their parents, ie down payment on a house, a new car... No matter what, they will surely appreciate it.

For the issues of financial aid, sadly, many moderate to upper middle class families do not qualify for much financial aid except in loans. Considering how expensive colleges are, kids graduate with tens of thousands of dollars of student loans. I would say that this is the biggest gift to the young people, help them start out with a manageable debt load.

    Bookmark   January 17, 2007 at 10:13PM
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When my sisters and I were born, our parents bought each of us a term life insurance policy. They made the monthly premium payments for our first 18 years. At that point, the policy had value and could be cashed out. We never knew these policies were in existence. My folks then took the proceeds and bought some stocks. When I was 22 and was finished with college, employed and in need of a car, they let me have "my" proceeds to make the down payment. Looking into something like this might be an option.

    Bookmark   January 18, 2007 at 7:37AM
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Actually, children don't even have to be of age to access money in their names--they can cash in bonds, or make withdrawals from a bank account that's in their name anytime (my dd cashed in her bonds when she was about 12--with my blessing, because we were putting the money into a higher-interest vehicle, but SHE had to do the transaction, since the bonds (birthday gifts from grandma) were in HER name, and it was no problem at the bank).

I also agree with keeping control of the money because you never know what can happen in life. My husband is a bill collector--most of the clients he visits are simply deadbeats who don't choose to pay their bills, but there are a significant number who have had a family tragedy--a child who develops a major (and expensive) illness, a husband who has an accident and can no longer work, the death of one of the breadwinners. It's heartbreaking to see people who want to pay their bills but don't even have enough money to buy groceries. You never know what life will bring.

If you decide to set money aside for your children, great, but put it in a separate account in YOUR name, promising yourself you'll never touch it except for in the most dire, life-or-death circumstances.

And while your motives are nice--have you considered what happens when teens, early 20-something children are given large amounts of cash for no real purpose? No good can come of it. As a matter of fact, my dd (25) still has about $12,000 in her college fun that she doesn't know about. There's no way I'd ever hand over that kind of money to a young person--they don't know how to manage that kind of responsibility. And I'm not alone in feeling that way--most folks I know, wouldn't want their children to be subjected to the dangers and temptations that a large stash of cash presents. Save for their college expenses, save so you can pay their wedding expenses, but I think, once you get to the other end of the road you're travelling, you'll realize that you don't want to give even good children a lot of cash--can turn even the best of them 'bad' in a number of different ways, pretty quickly.

    Bookmark   January 18, 2007 at 8:01AM
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Oh, and--I honestly didn't research this so don' tknow if it's true, but....

my MIL told me she knew someone who had died, and named her young son as beneficiary of her life insurance. He was a minor, so the money went into trust until he was 18. It could NOT be used to take care of him while he was a child. Because it was HIS money, not his guardian's money. So the person who had custody of the child was really strapped taking care of the child, and the money the mom THOUGHT would care for her child, wouldn't.

So, I named only grownups as beneficiaries of my life insurance. And I told them what the money was to be used for--the care of my kids. If my best friend had custody, and needed to buy a house in a better school district, or with more than 1 bedroom, that's what it would be for. Not to hand them a huge leg-up at the age of 18, but to make up for the lost economic power of MY earnings, and the effect it would have on them DURING their growth, not after it.

Of course, I picked their grandmother, who would follow those directions, and who motives and concern for them I absolutely trust.

    Bookmark   January 19, 2007 at 12:45PM
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Didn't you also post that your & your fiance are starting off your marriage in a lot of debt? I'm sure that's normal these days but how are you coming up with an extra $5000 in 2-3 yrs? And you'd still need to save for their college & your retirement.

Better gift(s) I think -- be good financial role model, clear all debts before having kids plus have fat emergency fund, be prepared for huge financial costs of just having kids (daycare or loss of income, plus lots of expenses you don't have now.)

And your kids would probably rather have a decent college fund then a post-college fund. If you have the $5k or any extra $, put in a 529 plan and add a little to it monthly from their b-day.

One more gift -- good life insurance on yourself & spouse (if she works). Never put minor child as beneficiary, should go into a trust.

    Bookmark   January 19, 2007 at 3:32PM
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Forgot to say that the trustee of the child's trust (that you name, might be same person as the guardian you name) gets to spend on the child as you have designated -- education, clothes, etc. In situation spelled out in prior message, insurance co. can't pay a minor so courts may have set up that trust, not the parents.

One more important gift for your unborn child before you do anything -- visit to an atty for a will!

    Bookmark   January 19, 2007 at 3:38PM
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You can give your children all the things you want to by setting a plan and living the plan. For example, if you have a goal of 2 kids, paying for college and then giving them this gift, funding your own retirement. How much of your salary should you be saving to achieve these goals, what is your assset allocation in your investment portfolio -- that's what you have to work at. Figuring out whether to put the $ in the child's name vs your own is quite beside the point.

    Bookmark   January 20, 2007 at 8:20PM
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a note on insurance: DH and I opted for "first to die" life insurance. As a less-expensive option. One insurance policy that covers both of us, but it only pays off once, whenever the first person died, whichever that it.

Never put minor child as beneficiary, should go into a trust.

wouldn't that mean you've have to set up the trust, when you signed up for the life insurance (which many of us have through our employers)?

    Bookmark   January 22, 2007 at 2:02PM
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When you set up your will, you set up the trust (which only actually gets set up when you die). Then go back and change your life beneficiary to "trust, per my will" instead of minor children. Can't do on 401k plans if married (has to have spouse) but can put for contingency. This is state of MD...not sure how other states work.

    Bookmark   January 24, 2007 at 7:06PM
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I just wanted to let you know that not all young folks squander their windfalls. When my husband (then fiancee) came into a sizable inheritance from his Grandmother, we eschewed the big, fancy wedding and honeymoon and instead used to funds as a down payment for our first home. We never regretted it.

    Bookmark   January 26, 2007 at 4:06PM
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Congratulations...you guys probably fall into a very small and elite group!

    Bookmark   January 27, 2007 at 3:09AM
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Dh and I are both pretty frugal....cuts down on the money arguments :)))

    Bookmark   January 27, 2007 at 6:45AM
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Can't do on 401k plans if married (has to have spouse)

I do not think this is true. I think that you must have your spouse's CONSENT if you choose anyone other than your spouse, and she or she must sign the form (maybe even notarized). But you do not HAVE to list your spouse.

    Bookmark   January 30, 2007 at 9:33AM
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T Sue -- You are right, you can put someone other than spouse on 401k if spouse gives consent. I was just trying to give a quick short answer before.

    Bookmark   January 31, 2007 at 2:59PM
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I have copied the article from NY Times about financial aid for college, which was timely for this discussion.


Copy and paste the web address.

    Bookmark   January 31, 2007 at 11:19PM
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