What would you do with managing a minor's inheritance

[kyrie]

My minor daughter was the beneficiary of my father's life insurance. I need to invest this money safely (she is 8). So far it has been in an annuity accruing interest (and I have had to pay tax on the interest on it, unfortunately).
She has 2 college funds that are pretty sizable, so I don't think dumping more into those funds would be a great help.

Should I sock it into a CD or a bond? I like the idea of it being tax free. Am I missing something?
Thanks so much for all ideas.

[bjl584]

Can you set up a ROTH in her name (not sure if you need to be 18 or not)? But that could be an option.

Or you could invest in muni-bonds. But, I would be more inclined to be more agressive with the money and watch it grow for her even if you have to pay some taxes on it.

[disneysteve]

If my daughter got a windfall at age 8 and college funding was already taken care of, I'd put at least some of that money, like 30-40% or so, in stock mutual funds to get some growth action.

Neither a CD nor a bond would be tax-free, except for some municipal bonds, but you should never let tax issues dictate your investment choices. If this is money she won't need to touch for many years, why be ultraconservative?

[disneysteve]

Can you set up a ROTH in her name

You don't have to be 18 to have a Roth but you do need to have earned income which I suspect she does not.

[bjl584]

You don't have to be 18 to have a Roth but you do need to have earned income which I suspect she does not.

That's the part that I was missing. I knew there was some catch that would disqualify a 8 year old.

[MonkeyMama]

If college is covered, I'd invest the money aggressively. She may not need any of it for 10+ years??

Aggressive meaning anywhere from 40/60 stocks/bonds to 90/10.

I am not sure how much money we are talking, so hard to give advice. One thing to consider is a UGMA account. Any account is a minor's name is a UGMA account (unless it is a specific tax shelter). At current, the first $1900/year in income/dividends is tax-free to minors. So that is something to consider from a tax standpoint.

That said, most people avoid UGMAs due to financial aid considerations and wanting to control the money. This is probably moot in her case, since SHE inherited the money. It's already in her name, I presume.

All the above said, I wouldn't get so caught up in the taxes. I'd focus on growth - any taxes will be minimal. I am presuming since I don't know how much it is...

[kyrie]

Its close to 50k. It is in her name (though I am the court appointed guardian of her estate).
Thanks for the input. Since the court is involved it can't just be accessed to buy lollipops & ponies. :-)

[Joan.of.the.Arch]

Are you aware of what your father had hoped the money could do for your daughter? If so, I would consider giving priority to that.

I also think it might be okay to use some or all of the money before she is an adult. Perhaps in a few years she will have developed an interest in something that takes money to pursue and you parents just do not have the money. Two & a half month's intensive violin study all four summers of her high school years? The money is there! Wants to make the trip to Guatemala with her Spanish class but her part-time jobs have not brought in enough money for the airfare? The money's there. Wants to be on the basket ball team at age 10, but you and Dad have not had a great year and so don't even have the money for shoes and the team uniform, much less gasoline to get to and from games? The money is there.

Of course I would not delve into the money for her use during childhood to capriciously. But for her very valuable personal development, yes, I would.

PS. Really, you cannot just buy lollipops and ponies? (Serious question.) Is there some stipulation in the will preventing the money's use until she reaches adulthood? If your Dad did not want you to manage it, maybe he would have specified exactly how the money should be held and until when.

[kyrie]

I think he expected to live longer and see her off to college, frankly. But he mentioned all of us going to Disney World at one point too. Yes, I have no desire to see it spent frivilously but for her development, most certainly. I have another daughter that he did not have a chance to name as a beneficiary before he died - she was just born.
Dad did not know you have to set up a trust, etc, so it was not properly executed prior to his death. It's caused a lot of frustration, paperwork and $$ to get things straight. I think the court gets an update yearly on its use so I have to account for it - that's my understanding of it anyway!

Ponies - no not so much. I make about $40k/year supporting a family of 4 in Chicagoland. No ponies in our immediate future.. :-) They do get lollipops often though!

Anyway, I just want to know about best investment options really.

[disneysteve]

I also think it might be okay to use some or all of the money before she is an adult.

Good point. Are there any restrictions on use of the money? There might be since it was left to a minor. You may not be able to touch it before she turns 18. If you were a court-appointed guardian, there may be limits on how you can invest the money, too. I'd check with your attorney. You probably have fiduciary responsibility. If you lose the money in the market, you could be liable for that.

[kyrie]

Wow, good point.
I have not been advised (yet?) on very specific restrictions - only that I will have to account for it yearly to the court (or whenever a withdrawl is made?). My atty hasn't really told me more than that. So, back to my original question... how should I invest it? Sounds like staying somewhat safe is best.

[disneysteve]

So, back to my original question... how should I invest it? Sounds like staying somewhat safe is best.

I think the answer to how to invest it depends on the answer to what restrictions are there. If there are no restrictions, I'd go with 40% or more in stocks. If there are restrictions, you need to abide by them, of course. Call your attorney on Monday and find out.

If you are limited to fixed income investments, CDs, savings bonds and Treasury bonds are probably your only choices.

[disneysteve]

I can tell you that my daughter has money that is managed by a court-appointed trustee (not me). It is held in a bank savings account. We get a quarterly statement. She can't touch the money until she turns 18.

[jpg7n16]

You probably have fiduciary responsibility. If you lose the money in the market, you could be liable for that.

You absolutely have fiduciary responsibility

As long as you can prove that you handled the monies in a manner that was always in the best interest of your daughter, you should be good.

I doubt you'd be liable for any investment losses as those are out of your control. The only liability would be if you were irresponsible in the handling of the money. Like buying stock options, futures contracts, investing 100% in precious metals, gambling on the ponies... taking excessive risk.

According to my series 65 study material here's what you need to know:

Source: Kaplan's Series 65 review, 4th ed. pg 122

It all began with the Prudent Man Rule. That legal standard was established in 1830 by a Massachusetts Court decision (Harvard College v. Amory, 9 Pick. [26 Mass.] 446, 441 [1830]:

All that is required of a trustee to invest is, that he shall conduct himself faithfully and exercise sound discretion. He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capial to be invested.

Also see the Department of Labor's view on the subject:

From: Meeting Your Fiduciary Responsibilities

Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include:

• Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
  
• Carrying out their duties prudently;
  
• Following the plan documents (unless inconsistent with ERISA);
  
• Diversifying plan investments; and
  
• Paying only reasonable plan expenses.

The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of areas, such as investments. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions. Prudence focuses on the process for making fiduciary decisions. Therefore, it is wise to document decisions and the basis for those decisions. For instance, in hiring any plan service provider, a fiduciary may want to survey a number of potential providers, asking for the same information and providing the same requirements. By doing so, a fiduciary can document the process and make a meaningful comparison and selection.

Following the terms of the plan document is also an important responsibility. The document serves as the foundation for plan operations. Employers will want to be familiar with their plan document, especially when it is drawn up by a third-party service provider, and periodically review the document to make sure it remains current. For example, if a plan official named in the document changes, the plan document must be updated to reflect that change.

Diversification – another key fiduciary duty – helps to minimize the risk of large investment losses to the plan. Fiduciaries should consider each plan investment as part of the plan’s entire portfolio. Once again, fiduciaries will want to document their evaluation and investment decisions.

So if you did something like 60% broad index fund (like S&P 500 or https://personal.vanguard.com/us/Fun...FundIntExt=INT ) and 40% bond index fund (https://personal.vanguard.com/us/Fun...FundIntExt=INT ) no one would have any basis for saying that you took excessive risk.

Though the main consideration should be 'what's in my daughter's best interest?' not 'what's most likely to keep me out of trouble?'

If you take a well diversified position with investments that are well matched to the time horizon (stocks need 5+ years), you should be good on both accounts.