Investing for Grandkid

[tqf258]

So we just had our first grandchild and we are planning on saving money for him.
Currently have started in a regular savings account at our credit union but would like to do something more aggressive with the money.
What do you guys recommend?
Also is this Gerber Grow up life insurance worth it buying just for peace?

[disneysteve]

Congrats.

Absolutely not to life insurance on children. Life insurance is to provide for people financially dependent on the person who died. Nobody is going to be financially dependent on this child for many years.

As for saving you could find a 529 if you want to save for their education. If you want something more general you can open a custodial investment account.

[kork13]

Congrats on the grandchild!

A 529 would be a good option for education, if that's of interest. Otherwise, for general investing, you can do a UTMA custodial account. I've got both set up for each of my 3 kids. Either is a great option.

I'm very strongly in the camp of "ABSOLUTELY DO NOT use a baby food company to buy life insurance" ... Furthermore, ANY type of insurance policy that offers an "investment" or "savings" capability is a HUGE red flag the size of Siberia -- RUN, don't walk, away from that crap. It's a massive waste of money, and a deceptive disservice to the public that they hawk the junk to.

All of that said, there can be circumstances where a small amount of life insurance for a child can be reasonable. Funerals & emergency end-of-life care for a child can be very expensive, and hit you all of a sudden. So if you want to have a TERM life insurance policy around $10k-$25k for a child, that's fine in my book. Often, parents can get an inexpensive policy rider attached to their own policy that covers kids. This is what I do -- in part, I have a $500k group policy on myself. But for $4.50/mo (~15% of my normal premium), I added a policy rider that provides $100k coverage for my wife, and $10k for each of my children. It's not much (either in cost or coverage) but when something like that happens, it's gonna be messy. Having ready cash to help handle funeral & final medical costs is valuable. My father had a similar policy rider in place when each of two siblings died (age 8 & 17 at their deaths) -- for a weather forecaster & schoolteacher, the money from that policy was invaluable.

[tqf258]

Thanks guys.
A little more detail we are currently doing 100/pay period and plan on adding other deposits during the year, my guesstimate is ~4-5K/year.
If its a custodial account does the money transfer to them at a certain age? I would assume so. My concern is I know what I would have done at 18/21 if I found out I had a fairly large chunk of money...and it likely wouldn't have been very financial savvy!!

I said Gerber because its the one that is recognized the most and seem cheap. My thought is exactly as kork13 stated, just a small policy for the worst case scenario.

[kork13]

Thanks guys.
A little more detail we are currently doing 100/pay period and plan on adding other deposits during the year, my guesstimate is ~4-5K/year.
If its a custodial account does the money transfer to them at a certain age? I would assume so. My concern is I know what I would have done at 18/21 if I found out I had a fairly large chunk of money...and it likely wouldn't have been very financial savvy!!

I said Gerber because its the one that is recognized the most and seem cheap. My thought is exactly as kork13 stated, just a small policy for the worst case scenario.

For UTMA (and UGMA) accounts, until the child reaches the "age of majority", the named custodian (typically the person who opened the account) manages & controls the account on the child's behalf. The account documents would show "Johnny Jr., with Granny/Gramps as custodian". There are some tax considerations if the account earns enough -- kiddie tax could apply, which complicates things. The rules for the UTMA (or UGMA) vary by state ... but in most states, a child reaches the "age of majority" sometime between 18-21, though some states allow you to delay the transfer until as late as 25. Until then, the money can only be used "for the child's benefit." That definition is fairly broad, which does provide flexibility. Beyond the defined age, it's theirs to do with as they see fit.

If you're concerned about how the child might use it, one option is to simply never tell the kid that the account exists, until they're old enough to use it wisely. However, that could create some difficulties with their taxes, since the accounts would earn income that is reported to the IRS under their name. Likewise, if they're irresponsible & having the money would likely do them harm (ex: drug use), I would have ZERO compunction about keeping their UTMAs away from my kids -- I'll disappear the money & get it back to them whenever they're capable of handling it safely. Of course, the best option is to simply ensure the children learn from a young age how to use money responsibly, so that when the UTMA money becomes available to them, it serves as a blessing & not a curse. That's the goal with my kids -- hopefully, their 529s will cover a healthy chunk of their college education, and the UTMA can be used to buy them a car, or make a house downpayment, or similar. I'm only feeding the UTMAs with $50/mo, intentionally keeping it somewhat small so as to not be a devastating loss if somehow it were to get misused.

Another option is the 529, which can only be used for education-related expenses (with minor exceptions). These accounts are owned & controlled exclusively by you, and the child would only ever be listed as a beneficiary of the account (and the beneficiary can be changed to a different, related family member if needed). This money never becomes directly available to the child. However, the funds must be used to fund verifiable education expenses, or else you'll face costly penalties derived from the "misuse" of the 529 money.

For the insurance, if the child's parents have life insurance for themselves, I'd suggest that they check what options are available to add a child policy on as a rider. Of note, this sort of policy rider generally is only an option for the child's parents/guardians ... I don't think that's an option for a grandparent or non-relative. But almost always, the policy rider is going to be far simpler & cheaper than setting up an separate policy just for the child. Besides, as I mentioned, most companies try to sell you crappy whole/universal/lifetime/cash-value/[insert marketing lingo] life insurance policies for kids. They're bad news. Stick with policy riders or simple term insurance policies, if you do anything at all.

[disneysteve]

If you’re concerned about the kid getting the money at 18, you could just open an account in your own name but earmarked in your mind for the kid down the road. When the time comes you can gift them the money however you’d like. You could give a lump sum each year based on the gift tax limit. You could pay for certain expenses like their first car. You could make a tuition payment for them. Whatever you choose, but the money would remain under your control.

[Fishindude77]

We did a $10k mutual funds investment for each grandchild and made their mother the custodian.

[Jluke]

I would recommend that your adult child is the custodian of the investment account for your grandchild and that the money is 100% invested in a total US Stock fund like VTI or ITOT or Schwabs version. Alternatively the S&P500 index fund like VOO.

[Like2Plan]

I think a 529 plan is a good idea because there are no tax consequences until it is used. (And, if it is used for education there are no tax consequences). The latest round of changes to 529s allows for this money to be rolled over to a Roth IRA (if certain conditions are met). A few of the conditions are- the account has to be open for at least 15 years, there is a maximum amount that can be rolled over, the child must qualify to make IRA contributions (in other words earned income) and you can only rollover what the annual IRA limit is per year. But, this could really quick start retirement savings in the early years when income isn’t very high.
https://www.cnn.com/cnn-underscored/...l3c8p5ls7ig4ge

If you want money set aside that has no intended purpose, I think Disney Steve’s suggestion of earmarking savings in your own name until you are ready to transfer it is another great idea. You could make a separate account and name your grandchild as the beneficiary so that it would automatically transfer if something happened to you before you had a chance to transfer it. If you invest in stocks (such as the total stock market)- your grandchild would have step up in the cost basis if received as an inheritance. If you transfer the assets in your lifetime, your grandchild would have the the same cost basis as when you purchased the assets (the same as if the funds were purchased in a UTMA account.). The long term capital gains could be lower at your grand child’s tax rate if you transfer the shares when you are ready to give the $$ to your grandchild (Of course, there are a lot of variables there. If your grandchild becomes highly successful - he or she could have a higher tax rate than you…But, you could always sell the shares before you gift to your grandchild in that case.)

As for life insurance- I agree with the others. If you are going to contribute 4-5k a year to savings for your grandchild, you will (probably) soon saved as much as the policy amount.

[mumof2]

Thanks guys.
A little more detail we are currently doing 100/pay period and plan on adding other deposits during the year, my guesstimate is ~4-5K/year.
If its a custodial account does the money transfer to them at a certain age? I would assume so. My concern is I know what I would have done at 18/21 if I found out I had a fairly large chunk of money...and it likely wouldn't have been very financial savvy!!

I said Gerber because its the one that is recognized the most and seem cheap. My thought is exactly as kork13 stated, just a small policy for the worst case scenario.

We were talking about this with our daughter who wants to have a baby this year and she said that any money saved the child won't know about until they are 25...she won't tell them because she wants them to be able to budget and work before they get any large sums of money etc...so maybe that is an option...putting stipulations on it for what it can be used for

[Jluke]

We were talking about this with our daughter who wants to have a baby this year and she said that any money saved the child won't know about until they are 25...she won't tell them because she wants them to be able to budget and work before they get any large sums of money etc...so maybe that is an option...putting stipulations on it for what it can be used for

In general, If the money is saved in an account that belongs to the child, how will they file their taxes without knowing the details of the account(s)?

If that is the plan to make them aware at 25, then the account should be in the grandparent or parents name only so they can pay the taxes; and hopefully when the time comes to gift the money to the child at the appropriate age all goes smoothly (no second thoughts about keeping the money for yourself, etc)

[LivingAlmostLarge]

open a 529

[mumof2]

In general, If the money is saved in an account that belongs to the child, how will they file their taxes without knowing the details of the account(s)?

If that is the plan to make them aware at 25, then the account should be in the grandparent or parents name only so they can pay the taxes; and hopefully when the time comes to gift the money to the child at the appropriate age all goes smoothly (no second thoughts about keeping the money for yourself, etc)

In australia inheritance and gifts to family are not taxed...so it doesnt matter

[Jluke]

In australia inheritance and gifts to family are not taxed...so it doesnt matter

I guess. But I wasn’t thinking of inheritance.

in that case though, what about the year after the money is inherited and the account generates dividends/interest/capital gains - Then that will trigger taxable events ?

Point was if the account belongs to the child (not inheritance); they start working; file their own taxes; they will need to know about this account to do their taxes (USA) or their tax forms will be incorrect.

you can only keep it hidden for so long. My kids do not know about their investments but they are under 10 years old. The oldest knows they own Apple and other companies but not the total amounts. I only have to file state taxes for them currently as they are not required to file federal since their unearned income doesn’t meet the requirements to file (USA).

[myrdale]

Also is this Gerber Grow up life insurance worth it buying just for peace?

Never buy this product. You're buying insurance in case your child dies, you get a "free" funeral. How screwed up is that.

The death rate for children is something like 25 per 100,000, or 0.03%. This is a product for people who don't understand math.