[Financial Planning] Deciding on Investments for Children's Future Growth

The main takeaway is about deciding between 529s, UGMA, or UTMA for financial gifts to kids based on their future goals and tax implications.

### Managing Financial Gifts for Children: 529 Plans, UGMA/UTMA, and Tax Considerations
* 💸  Shannon M. received **four-figure gifts for her children** when they were born, which have been **invested in a total market index** in the parents' brokerage account.
* 🎓  The decision to move this money to a 529 plan or leave it in an UGMA/UTMA account depends on the **goal for the funds**. 529 plans are ideal for **education expenses**, while UGMA/UTMA accounts offer **flexibility for various purposes**.
* 🏦  The current setup in the parents' account creates tax and ownership issues, as the assets technically belong to the **parents, not the children**.
* 📊  Moving the funds to a 529 or UGMA/UTMA account can provide tax advantages, as the assets will be taxed at the **children's likely lower tax rate**.
* 👨‍👧‍👦  Considering the children's ages (3 and 6) and the nature of the gifts, it's important to **plan for potential risks** and **educate the children about financial responsibility**.
* 💡  Financial advisor Brian Preston suggests, "If you're doing everything you should and putting skin in the game, teaching them, doing matching funds, helping making them buy part of their first car, **learning them to about give, save, spend**."
* 📈  The ultimate decision should align with the family's **financial goals and values**, considering **potential risks and benefits** of different account types.
* 🎁  In conclusion, it's crucial to consider the **long-term implications** of managing financial gifts for children, balancing **tax efficiency** with the children's **financial education and responsibility**.

[Music] Well, I do have a question CED up from Shannon M. It says the kids got four-figure gifts, so financial gifts, when they were born, which is very nice. They put them into a total market index in the parents' brokerage while we decided what to do. We have since set up 529s. So do we move this money to the 529 n do we just leave it where it is and let it grow? Do we put it in an ugma or an utma? What would you do in this scenario? Well, there is a structural issue here. Well, there's a, it sounds like there's going to be a tax issue, is what I um. So the question is, okay, what account do I put the dollars in? Let me speak to that one first. It depends on what the goal for the dollars is. Now, she didn't mention how old the kids were, just they got four-figure gifts early on. So we don't know if this is money that you got when they, you know, 10 years ago when they were born or maybe your kids

are 10 months old. And so they been there for less less than a year. But whenever you're deciding what to do for kids, you need to recognize that different types of accounts have different structures to them with different benefits. Uh, you mentioned a few 529s. It's an amazing way to save for college education or for private K through 12 education. So if your goal for these dollars is to save for Education, 529 could be a fantastic solution. And if you happen to live in a state that has a state tax deduction, not only can those dollars grow tax deferred be tax-free for Education expenses, you can get a tax deduction on the front end if you live in one of those States. If, however, you have a less certain idea of what you're going to do with them, like maybe it's going to be for a wedding or maybe it's going to be for the first car, maybe it's going to be for, you know, fill in the blank, then a up account might be a great, uh, solution where you serve as

the owner of the account. Then you have a beneficiary who's a minor as the beneficiary of the account, and it can continue to grow. And then when they get to 18, it becomes their dollars, and it can be used for any types of purposes. So I think you have to answer the question, what's the goal of the dollars? Now you bring up a very interesting thing, Brian. Their current strategy, let's assume that the dollars they put, you said I put it in the parents' account, and we invest in total market index. It creates some friction, and that friction gets bigger and bigger and bigger as time goes on. Would you suggest if it's for if the money's for the kids, should they leave in the parents' account until the kids get to of age, or should they do something else? No, I definitely think that because there's several things that I was immediately thinking of taxes is a big part of this, plus it, you I think it's a solid point to say friction cost M um because how look you don't really own the assets.

I mean, if they stay, if the money was put in the account, um, minds could change. I mean, because there's really, it's a promise, is all it is right now, that's right, um, and that's one of the things. So, and that's why the government going to say, Nope, they pay the taxes, not you, and all these tax-favored things we could do with 529s and custodial accounts, those don't really count because they still kept the strings on it, um, so the ownership and control matters, structure matters just from, I mean, I love the tax-favored way that these accounts could grow if you actually get it into the 529 or the custodial accounts, but you just have to, the why or what the goals of this money have to intersect appropriately, and but you should know the ins and outs on that. I will tell you over the weekend, I just got the letter from the custodian saying my oldest daughter's account now officially has to not be a cust account because, you know, whatever your age of

majority is in your state. They're going to start nudging you to turn that into an individual account. And by the way, you lose complete control and access and everything. So your now legally adult child has access to these big accounts. But we all know that maybe even though they're legally adults, have they learned how to do money well enough that you trust them with these large sums of money? Because a four-figure investment for a newborn is going to be a chunk of money by the time that they reach the age of majority. So I would take that into account. The goals really are going to drive a lot of this. That's why 529 is custodial accounts but get it outside of the parents and prob now you have to do a tax analysis to see and they're going the parents are going to have or grandparents are going to have a decision of do we just now reft maybe they're they're flush enough they just give you the market value in cash in the 529 or custodial account or do they

need to liquidate, and you'll figure out who the heck's going to pay the taxes on it. There are all kinds of complexities. That's why I like the idea if you're going to do these type of goals, kind of begin with the end in mind so that you're not coming back four years later with the complexity of, Man, we should have known how we were going to put it in structure-wise so we didn't have to add this turn this awesome intended um gift into a complex transaction. Yeah, the context Shannon said that the kids are three and six. These were cash gifts from the grandparents, you know, when the kids were born, right? Is what happened. So one of the downsides of Shannon what you did, you said, Hey, okay, we're just going to put it in our account. We're going to invest it. As that money grows, if it's in your account, it's going to be so it's in the parents' account, yeah. So they, that was my understanding, they got the money, they just deposited.

it's been growing in the total market index. So like you said, there's going to be a tax consequence if you are to sell that. But that may be okay, that may be prudent because if you leave it in your name, you're going to continue to pay tax on those dollars as they grow as you transact. The beautiful part is if you do get it into an MA, do get into an UGMA, those are likely not going to pay any taxes because it's going to be taxed at the kids' tax rate, which is likely going to be 0% for a zero and a or for a three-year-old and a six-year-old. So odds are pretty good that it would be more tax efficient not being in your name. Now someone made a comment, and I just want you to speak to this. And I'm sorry I'm going long Ry, but you know what can you do? We just got off book tour. Somebody said, Oh man, why would I ever do this? What I don't know what my kids are going to be like at 18. I don't

I don't, and you've had clients that have had that concern before. Like, why would I put money in up if it becomes their money at 18? Isn't that risky? What's the guidance you said? Or how do you nav? How do you tell parents to think through that? Well, yeah, I mean, yes, it is risky, but I mean, my experience, I don't think my daughter is going to go blow through all this money because if you're doing everything you should and putting skin in the game, teaching them, doing matching funds, helping making them buy part of their first car, learning them to, to, to about give, save, spend. I mean, hopefully these things are accounted for with all those, those 20 years that they were living in your household and you were teaching them. Now, if they, but there is the risk that they, that they could blow it. They could go buy the Corvette, the, the, you know, or some other nicer car that would not be practical for life but seems reasonable for a 20-year-old. But even as we had clients navigate this.

they've been like, all right, you're going to go. You can take this into account and you can go blow it. But you know, you're kind of selling the, you're stealing the milk and selling, getting rid of the cow or whatever that expression is. You know what I mean. It's just that real reality is that families that are doing this, there's probably more stuff out there. And you don't, if you had somebody give you this opportunity, you should bear the responsibility of understanding this is a blessing. And you don't want to blow it. Mom's spaghetti.

Where Should We Keep Money That Was Gifted to Our Kids?

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Managing Financial Gifts for Children: 529s, UGMA, or UTMA?

It's important to consider the goal for the gifted money before deciding on the type of account to use.

529 accounts are ideal for saving for education, offering tax benefits, while UGMA or UTMA accounts are more flexible and can be used for a variety of expenses.

The decision should take into account the age of the children and the specific purpose for the funds.

It's important to consider the goal of the funds and the impact of taxes when deciding where to invest money for minors.

Friction costs and the issue of ownership and control should also be taken into account, especially when considering 529s and custodial accounts.

Ensuring that the chosen financial structure aligns with the goals for the money is crucial for its growth and use in the future.

Managing Large Financial Gifts for Children

Consider the child's financial maturity before turning over a large sum of money from custodial accounts.

The goals of the investment will drive the decision-making process for 529 or custodial accounts.

It's important to plan ahead to avoid complex financial transactions and tax issues in the future.

The Benefits of Setting Up an UGMA for Your Children's Investments

Setting up an UGMA can be more tax efficient as it will likely be taxed at the children's lower tax rate.

Despite the risk that the child will have access to the money at 18 and may spend it irresponsibly, parents can mitigate this by teaching them financial responsibility over the years.

It's important to guide parents in considering the long-term financial education and lessons they have instilled in their children.

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