Mr R and I want to set up savings (?) accounts for our niblings. We’ve talked with our siblings(-in-law) and have their OK since honestly, these kids have way more toys than they’ll ever use. So having an account to put money in for birthdays and whatnot makes more sense. How much we contribute will depend on whether or not we end up having children… but since that doesn’t seem to be happening any time soon, we want to get something set up for the niblings.
No one in my family/circle of friends has set up an account like this so I’m not sure where to start. We do NOT want it to be a tuition account since we recognize that they may or may not go to college. We do want it to be inaccessible to the children (and the parents if possible) until the kids are a certain age, fulfill certain conditions, medical emergencies, etc. Some of our family members are irresponsible with money and others have mental illnesses and I’d rather the parents (our siblings) not be able to access it.
Are these kinds of accounts possible? Where do we even start?
My inlaws did this for my daughter. They just opened their own separate account, in their own names. For holidays and birthdays, they would give a card saying that a deposit had been made in her account. After graduation, the in-laws started sending her monthly checks. DH and I are totally out of the loop.
@Sybylla not sure yet. Depends on whether or not we have children. Minimum ~$10-15k without interest by the time they reach adulthood. If we don’t have kids, it’ll probably be a few times that.
So not a ton but enough that it would give them something to start out with.
Every major fund house (Vanguard etc) has a UTMA-like account (uniform trust to minors), in which you set up an account for a minor while specifying the guardian for the minor’s account. When the minor comes of age s/he gets full access to control the account. That money can be used for any purpose, and while the child is still a child other people can’t access it. The size of the fund is limited based on the annual gift amounts permitted, generally in the neighborhood of 14K or so per year.
A 529 account is a specific type of account for the child, in that it is always from an individual to an individual. It is subject to the same gift tax limits in terms of annual deposits. Its uses are limited to qualified educational expenses. A niece/nephew falls within the definition of related individuals for a 529. If it turns out not to be used for education expenses then the money can still be withdrawn, albeit with a penalty.
I’d recommend starting over at Vanguard for the cheapest index fund you can get, low expenses, with something like a 2050 retirement index mix of stocks/bonds. Download their docs on UTMA and 529s. You do need to let the parents know, since you need the child’s SSN in order to set this up.
Also, your intentions here are really considerate imo.
@romanigypsyeyes I would suggest that somehow you have these accounts NOT in the names of the kids or their parents. When college financial aid time comes, those will be considered assets. It might not make a difference…but it might.
Are these accounts you hope will be used for higher education? If so, set up 529 accounts…but you should be the owner of those accounts. Or are they going to be for any purpose? I started a savings account for my niece. I was the trustee/holder of that account…and she was somehow on it as well. But it was my asset, not hers…until I turned it all over to her.
Do you have a credit union? If so, you can set up an account (savings) for each child with you as the co-owner at no cost. You’ll need a SSN for each child. The statements can go to you but they would be in the child’s name. The money would be accessible to the child, but if the child doesn’t know about the account, it will just grow untouched. If at any time you have enough money to want to earn decent interest, you can buy a CD.
My mother did this for the grandchildren and put $10/mo in each account. For my kids they actually used the accounts as their main savings and later checking accounts, but several of my nieces and nephews just let the money ride. My niece who is now about 35 uses the account as her ‘vacation’ account and puts something like $1000/mo into it and then pulls it out for vacations.
It would be the asset of the child and need to be claimed on FA forms…in 18 years.
If you set it up as a college savings account (a Coverdell or 529) and they don’t go to college, you can either name a new beneficiary, or withdraw the money with a penalty. There are annual funding limits ($2K on a Coverdell per beneficiary and the gift tax kicks in at $14K on a 529), so you might have to coordinate with the parents to make sure you are not going over.
If you set it up as a UGTM account, they can do whatever they want with the money as soon as they turn 18.
I bought stocks for a niece and nephew under UGTM. They are 18+ now and I can’t get my name off their accounts. Technically they could and should have taken it over - and I was expecting them to (what teen wouldn’t?). But their parents funded their colleges and they haven’t moved to otherwise take control. No big deal, it isn’t a lot of money and I am not responsible for the income taxes, but it was a bit of an annoyance to be continually forwarding statements and paperwork to them. Finally I changed the address to their house, though I’m pretty sure my name is still involved.
If I was to do it again, I would have set it up in some manner that I could be sure to be able to wipe my hands of it after a time.
That’s super generous of you @romanigypsyeyes - and a great idea to boot. Reminds me of how my relatives always bought my kids savings bonds for birthdays and special occasions. I like the savings account even better. It has been a blessing to have that stash as they have become young adults. Only one of three has used their bonds but it was key to purchasing a first house. That’s a gift.
FYI some states allow you to set up a UMTA/UGTM with a turnover date of 21 instead of 18. Not sure which states it’s applicable for, so check your own state’s laws but you designate it when you set up the account.
Point of clarification on the gift tax: it’s the donor, not the recipient, who pays the federal gift tax—and only when they die, and only if the combined value of decedent’s taxable estate and lifetime taxable gifts exceeds $11.4 million. So unless you plan to die very wealthy, you probably don’t need to worry too much about the gift tax.
You do need to report to the IRS any gift exceeding $15,000 in a calendar year, whether it’s made in single lump sum or spread out over multiple installments. But for most of us, this is just a paperwork requirement. The IRS wants to keep track of all taxable gifts for purposes of calculating the total when you die. Gifts up to $15,000 are exempt from taxation and don’t need to be reported.
Also, Mr. R can make his own $15K gift annually free from taxation and reporting, so the two of you could jointly give up to $30K per year this way. And there are absolutely no tax consequences to the recipient, so coordination with the parents for tax purposes isn’t necessary, though of course you should tell them what’s up.
Apparently they opened accounts for both of our kids. We knew nothing of it at all. The statements were mailed to them…not us. Fortunately these were kids without earnings and interest was LOW so there was no income tax liability.
Well…without a speck of forward info, they decided to have everything sent to us. The first thing we got was a 1098 I from a bank we never heard of…in a state in which we don’t reside. But our kid’s SS numbers were on the accounts.
Oh and this was while they were in college…oh heavens. Of course we included them on THAT year FAFSA form, it we had not done so for previous years. We had no idea these accounts even existed.
The kids were both over 18, so we suggested they withdraw this money and use it for part of their college costs, which they both did.
It took a lot of questioning but we finally got my in-laws to tell us that this was from them. I have no idea why this was a big secret. They had the kids’ SS Numbers because they used those on savings bonds they sent annually.
I knew there was a reason I asked here. I’ve never heard of several of the things mentioned here - accounts, taxes, etc.
Forgot about FAFSA/other FA stuff. 3 of the 4 will DEFINITELY need (and get) income-based FA. The fourth will be full pay, barring something devastating happening. This fourth one is also a dual citizen so I’m not sure if he’ll be going to college here or in Japan.
If you are the first name on the savings account, the interest is reported on your tax return. In the old days, the second person’s SSN wasn’t needed, but I expect that has changed. If it is a savings account in your name, and the nibling is secondary, then it might be your money at FAFSA time. But check the rules carefully.
You also could consider having only your name on the accounts fo now, but with the niblings named as beneficiaries in the case of your untimely demise.
Boring I know, but I had friends whose grandparents gave them US savings bonds every year. The money build up into a tidy sum over time, and couldn’t be readily accessed until the bonds matured.
I’d run some of this by the accounts team at your bank or credit union and see what pitfalls they are aware of for the various kinds of accounts.
Agree with the savings bond suggestion. You can buy savings bonds online at Treasury Direct and the bonds are virtually invisible to everyone except the Treasury Direct account holder. They accrue interest for 30 years with no annual reporting or tax consequences until they are redeemed. You can add niece/nephew names as bond owners. The interest on bonds is not taxable if used for education expenses.
Yes, the recipient pays taxes on interest as earned. If it is a joint account, Romani and husband could take that as income yearly. I just think the Romanis are a long way from gifting more than $30k per year to each nephew.
She said they want it fairly liquid so a savings account seems best. A 529 would probably grow faster but it is more limited.
Thinking about just a joint savings account, like an online Barclays or Ally or other higher interest product (2% is higher than the 0.25% at my regular bank) could you open a joint account with each kid and put yourselves first, you pay the income taxes on the interest (you are already funding the savings with after tax income) and then when the time comes, if you still feel led to give it to them, you can. If they are in a screwed up place in life, you don’t have to give it to them until things are better.
In this way, no FAFSA issues. When they go to college, you could spend some of the money on them or give it as a graduation gift to avoid FAFSA issues.
I know at some point in time I was on my parent’s account as joint and the taxable income went to them so that can be done.
I suppose another option, as previously mentioned, is to have each of them be the beneficiary of a savings account, if you reach a place that you want to gift them, you can gift each year the limit at that time.
