Inheritence for a minor

[Slicer]

My son and I received an inheritence recently and I'm trying to figure out where to put his portion.

We setup a UTMA for him a while back with about $2500. The intention was to build this up in conjunction with a 529 we setup about 5 years ago and the UTMA would help pay for costs associated with college that a 529 couldn't be used for (ie: car or other non-qualified expenses).

However, we were thinking that it might not be good to have, say $30k, in a UTMA readily available to an 18 (or 21, whatever the age is) year old. So, the new plan was to invest in a brokerage account (in my name) to be used for those non-qualified expenses, if he needs it; otherwise, it would be used for my retirement.

Anyway, back to the inheritence. Obviously, this money is his to spend; however I'm still a little cautious about putting it into his UTMA and be available to spend on anything he wants at a young age. I'd prefer to oversee (to an extent) how he spends this money.

I guess the options are:

1) put it in his UTMA and hope he doesn't just blow it
2) put it in a brokerage account (in my name) knowing it's his money and dole it out for things I feel are reasonable. Possibly even giving it all to him at (18 or 21) if at that time I feel he wouldn't just blow it.
3) open up some kind of trust
4) some other option I'm not thinking about ??

Anyone dealt with something like this in the past or have ideas on how I can still hold the reigns a bit on the spending of this money?

[Merch]

I like the trust idea. I would want it to be total seperate from my assets but have the ability to control it.

[disneysteve]

I'm trying to figure out where to put his portion.

the new plan was to invest in a brokerage account (in my name) to be used for those non-qualified expenses, if he needs it; otherwise, it would be used for my retirement.

This plan would probably qualify as theft. This money is HIS, not yours. If it was left to him, you can't turn around and claim it as your own and invest it in your name. And you certainly can't use it to fund your retirement.

I totally understand your concern of him coming into a large sum when he turns 18. Our daughter will receive a legal settlement beginning when she turns 18. We were just talking to her about it over the weekend.

I think all you can do is try your very best to educate him about personal finances, the importance of saving for the future, living within your means and impress upon him how this money, properly managed, can give him a great start in life and make things easier for him if he doesn't blow it on a new Corvette. That's certainly the plan we've been following with our daughter.

I don't know about the trust idea since it is technically his money. I would recommend speaking with a trust attorney to see what options there are in that area.

[aida2003]

Our daughter will receive a legal settlement beginning when she turns 18. We were just talking to her about it over the weekend.

Just for my curiosity, could you elaborate more on this, Steve. Legal settlement is not the same as an inheritance, I'm guessing, so I'm nosy what you're talking about.

[jIM_Ohio]

I think the control aspects you are looking into are clouding the bigger issue- if an 18 year old blows 30k, that is because he did not learn how to manage money while younger.

How old is your son?
How much is the inheritance?
Did you ever see Brewster's Millions?

If inheritance is 30k, I would suggest either creating a trust or just adding to UTMA account.

Maybe shell out an allowance of $80/month from it ($1000/year). Teach child about many things- investing, spending etc. If child sees 30k becoming 10k, they might stop spending because they like the look of the larger amount. Maybe the investment grows more than 1k per year, so the account still has 30k when me becomes age of majority.

[disneysteve]

Could you annuitize this money? Use it to buy an annuity that would produce a stream of income for life, rather than him receiving a large lump sum all at once.

Just thinking "out loud" here.

[disneysteve]

Just for my curiosity, could you elaborate more on this, Steve. Legal settlement is not the same as an inheritance, I'm guessing, so I'm nosy what you're talking about.

She was injured in an auto accident when she was 6. There was a legal case and she was awarded a settlement. We opted for the annuity rather than the lump sum. So when she turns 18, she'll begin getting a monthly payment. Had we gone for the lump sum, she would have received that at age 18 and we didn't think that was a good idea.

[Slicer]

This plan would probably qualify as theft. This money is HIS, not yours. If it was left to him, you can't turn around and claim it as your own and invest it in your name. And you certainly can't use it to fund your retirement.

Sorry.. I guess I didn't convey might thoughts very well. I definately have no plans of using his inheritence for anything other than his benefit.

I was trying to point out that, before the inheritence, we setup a 529 which is now about 30k, after that our plans were to setup a UTMA to accumulate another (roughly) 30k -- it currently has $2500. We stopped the UTMA contributions in favor of setting up a brokerage in my name that I would know is to be used for education / non-qualified expenses *OR* if he got a scholership or didn't go to college, that brokerage account would simply be added to my retirement. We still haven't actually setup this account. All of this was the plan before the inheritence -- and probably still is. That's why my original post has the "Anyway, back to the inheritence." comment.

We're definately trying to encourage saving and spending wisely. But who knows how he'll be in 10 years when he turns 18. My wife and I have been doing well for a while now and save a lot, have almost no bills and pretty much buy whatever we want (with a lot of thought of course). That's good, except he doesn't really understand how we struggled financially early on, which made us better than average savers/spenders.

Anyway, I guess I'm just interested in what others have done in similar situations. We'll 'probably' just add it to the UTMA account and teach what we can over the years and hope for the best.

[disneysteve]

Anyway, back to the inheritence.

I guess the options are:

2) put it in a brokerage account (in my name) knowing it's his money and dole it out for things I feel are reasonable. Possibly even giving it all to him at (18 or 21) if at that time I feel he wouldn't just blow it.

Sorry if I misread the post. But you did say this. I don't believe you can legally put his inheritance into a brokerage account in your name, no matter how you intend to use that money. And depending on how much money we are talking about, giving it all to him at 18 or 21 or whenever could have tax consequences. Also, how are you going to explain on your taxes where this money came from if you put it in your name? You didn't inherit it - he did.

Keep this money out of your name. It isn't your money.

[Like2Plan]

Sorry if I misread the post. But you did say this. I don't believe you can legally put his inheritance into a brokerage account in your name, no matter how you intend to use that money. And depending on how much money we are talking about, giving it all to him at 18 or 21 or whenever could have tax consequences. Also, how are you going to explain on your taxes where this money came from if you put it in your name? You didn't inherit it - he did.

Keep this money out of your name. It isn't your money.

Disneysteve,
I think you are misreading the post. The OP has two streams of money about which he is talking. Before the inheritance, he had set aside funds from his own pocket to put in an utma account for his child. He has thought twice about these funds and is now planning to keep the funds in his own name instead of making more future contributions out his own pocket to his child's UTMA account.
The second stream of money is the inheritance in which the OP is trying to decide how to best manage for his child.

[TBH]

My son has a UGMA account that was set up by my grandmother. It has about $3K in it. I would not have chosen to do a UGMA, and I don't add to this account, but I'm grateful that my grandmother wanted to do that for him. When we save for him, we put it into 529 accounts.

If the inheritance is large enough that you expect there to be some left over after college, or if you still want to save for and pay for college yourselves, I'd say put it into a trust. When your son is old enough and mature enough, you can make him the trustee of his own account.

Until that time, you can be the trustee. I like the idea of using this kind of trust to teach financial lessons. For example, you could match his savings from the trust, so that he's still having to learn how to save but he's also getting to watch the savings grow very fast. Or, if he gets a job as a teenager, you could move money from the trust to fund a Roth IRA for him.

[disneysteve]

Disneysteve,
I think you are misreading the post.

The second stream of money is the inheritance in which the OP is trying to decide how to best manage for his child.

OP, can you clarify this? Sorry if I'm being dense here. Your post confused me. You listed 4 options you are considering: UTMA, brokerage in your name, trust and other. Are those 4 options referring to the inheritance money or other money? If they refer to other money, my apologies for confusing the issue. If, however, those options are regarding the inheritance, then I stand by what I said in my last post. You can't do #2 on your list because the money doesn't belong to you.

[Like2Plan]

Slicer,
You might want to get some professional advice with an attorney and/or accountant if the inheritance is a large amount. For the inheritance until your child is of age, you will have to have some sort of a custodial account or a trust--the downside to a trust is that it costs money to establish and it costs money to maintain. (A lot would depend on the amount)

You could also set up a custodial 529 account with your child as beneficiary and account owner (and you the custodian).

There are some pitfalls to the regular UTMA account--one being the kiddie tax where your child will be taxed at your rate for earnings above a certain threshold (for 2007, it is 1700 of unearned income). The kiddie tax extends to age 24 if your child can be claimed as a dependent on your taxes. You may want to select investments for your child which are tax efficient.

Depending on your risk tolerance (and the amount your are dealing with), you could set up a custodial brokerage account with the inheritance. One strategy would be to pick stocks (or funds) that are primarily growth stocks that will be held for a long time to reduce the taxable events.

You can invest in just about anything--you could even invest in gold coins for your child if you thought they would do well over the long term.

[Slicer]

Sorry for the confusing post.

There is my personal out-of-pocket money that I've contributed to:

1) a 529 ($30k)
2) then a UTMA ($2500)
3) now, am considering a brokerage in my name for his education; then my retirement (no contributions yet)

There's also, just recently, an inheritence (ultimately, $34k?) that I'm trying to determine what to do with, without giving a young person free reign with that kind of money:

1) add to his UTMA
2) a new brokerage in my name that I release as needed
3) a trust of some kind
4) other

Sounds like there could be a problem with #2, even if I have every intention of giving him every penny.

Again, I'll probably just drop it in his UTMA.

BTW, I had my taxes done last week and the CPA suggested just putting it in the UTMA. There's a slight tax break for the first $700 owed in taxes (according to him) and after that it's at my rate. He didn't say anything negative about me setting up a brokerage in my name, except that it's fully taxable at my rate. Really, he wasn't considering the fact that a young adult would have access to, possibly, $60k at 18 years old. (The $34k would be invested aggressivly over the next 7 - 10 years -- at least for the next 5 years. )

[jIM_Ohio]

I would take the 34k and open a basic mutual fund account for your son. Maybe put 50% into a wilshire 5000 index, 25% into another fund and 25% into a CD or money market.

Let your son spend the interest on the CD each year- to remind him he has the money and learn how to spend or save. 3% of 25% of 34k is $250 per year or so... $20 am month allowance kind of thing as interest from the CD.

You taking complete control for fear he spends it is misguided intentions. I know you mean well, you need to decide if $250/year is enough to teach your son the value of the money invested, and allow him to make a good decision with it when older.

Another suggestion would be to convert the 34k to an IRA when son starts working. if he earns 5k in a year, sell 5k of the investment and open a Roth for him that year.