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Where to park cash gifts for kids?
Old 05-15-2021, 01:44 PM   #1
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Where to park cash gifts for kids?

My parents just handed me 3 checks for $10k each made out to my minor children. Their 529s are pretty well funded so I donít want add to those. Iím in a high tax bracket so I want to be sure Iím not taxed on their earnings. None of them work yet so a RothIRA is out for now.

Any suggestions where to keep the money? There may be more checks to come each year.
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Old 05-15-2021, 02:26 PM   #2
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Broad low cost equity fund, maybe even a tax-managed fund, that does not throw off much income. Your CPA can explain the taxation but IIRC the income quickly becomes taxed at your rate. When the kids start to work, they can move the money into Roths to the extent of their earned income. Vary sweet deal.
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Old 05-15-2021, 02:35 PM   #3
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IBonds?
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Old 05-15-2021, 02:43 PM   #4
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Originally Posted by anothercog View Post
Any suggestions where to keep the money? There may be more checks to come each year.
You might suggest your parents make a trust, with a starting age limit, instead of a cash pile up. You probably don't want them spending when they are too young, turning 18 and having no-strings-attached legal access to huge amounts of cash (i mean 18 year old me woulda LOVED it but it would have been a terrible idea).
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Old 05-15-2021, 02:44 PM   #5
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IBonds?
History is that equities wildly outperform both bonds and inflation at a cost in voltility. Kids have a long, long investment so volatility should IMO not be a concern. Note the Y-axis is logarithmic:


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Old 05-15-2021, 03:17 PM   #6
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You might suggest your parents make a trust, with a starting age limit, instead of a cash pile up. You probably don't want them spending when they are too young, turning 18 and having no-strings-attached legal access to huge amounts of cash (i mean 18 year old me woulda LOVED it but it would have been a terrible idea).
I am generally a fan of trusts but in this case the tax aspects should get a good look from a CPA. IIRC, the top tax rate of 37% is reached with only about $12K of undistributed income.
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Old 05-15-2021, 05:25 PM   #7
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History is that equities wildly outperform both bonds and inflation at a cost in voltility. Kids have a long, long investment so volatility should IMO not be a concern. Note the Y-axis is logarithmic:



Yes, I know equities outperform. But heís looking for an investment that wonít affect his taxes. So I suggested iBonds because theyíre tax deferred with some inflation protection.
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Old 05-15-2021, 05:35 PM   #8
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Yes, I know equities outperform. But he’s looking for an investment that won’t affect his taxes. So I suggested iBonds because they’re tax deferred with some inflation protection.
WADR, I would say that would be an extreme example of letting the tax tail wag the investment dog. The criterion should not be whether these gifts, as they grow, affect the OP's taxes. It should be whether the chosen strategy maximizes the amount of family wealth accruing from the gifts. If history is a guide, a 100% equity strategy will do that.
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Old 05-15-2021, 05:44 PM   #9
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WADR, I would say that would be an extreme example of letting the tax tail wag the investment dog. The criterion should not be whether these gifts, as they grow, affect the OP's taxes. It should be whether the chosen strategy maximizes the amount of family wealth accruing from the gifts. If history is a guide, a 100% equity strategy will do that.

Thatís for the OP to decide. Not everyone is 100% equities all the time.
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Old 05-15-2021, 05:46 PM   #10
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Since the gifts are to your kids, they are minors, and you don't want to add to their 529 plans, the most sensible thing I can think of is to open UTMA accounts for each of them.

You can open UTMAs at Vanguard and probably at Schwab and Fidelity as well. They might call them custodial accounts.

You can probably work with the UTMA custodian where you open the account to deposit those checks directly into the kids' UTMA accounts. Then you can buy whatever you want inside a UTMA account - stocks, bonds, mutual funds, etc.

UTMAs are free to set up and are taxed at the kids' rate (which might be 0%) for the first $2200 of unearned income. Beyond $2200 the unearned income is effectively taxed at the parents' rate.

The only real drawback to a UTMA vs. a trust is that the kid technically has access to the money at age 21, so there's always the fear/concern that the kid blows all their money on a new car or drugs. The answer to that is to explain to the kid that if they do that then they're cut off from any additional money / inheritance, which it sounds like there probably would be in this case.

Almost all states have UTMA laws. One or two may still have UGMA, which was an older version of the law that is also probably OK.
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Old 05-16-2021, 06:10 AM   #11
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Originally Posted by anothercog View Post
My parents just handed me 3 checks for $10k each made out to my minor children. Their 529s are pretty well funded so I don’t want add to those. I’m in a high tax bracket so I want to be sure I’m not taxed on their earnings. None of them work yet so a RothIRA is out for now.

Any suggestions where to keep the money? There may be more checks to come each year.
I would consider EE Bonds... while they only "pay" 0.1%... if you hold them for 20 years then they are guaranteed to double in value, which is a 3.57% annual return... very good for a risk-free investment.

Though the 20 year time horizon may be a bit longer than you would like if the kids want or need the money earlier you can transfer the EE Bonds to you in exchange for cash for them or float them a loan and have them pay you back when the ee bonds are 20 years old and double.

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The interest rate for a bond bought from May 2021 through October 2021 is an annual rate of 0.10%. Regardless of the rate, at 20 years the bond will be worth twice what you pay for it. If you keep the bond that long, we make a one-time adjustment then to fulfill this guarantee.
https://www.treasurydirect.gov/indiv...es_e_bonds.htm

Set up a Treasury Direct account in each child's name with their SSN as the TIN. Limit of $10k/year.
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Old 05-16-2021, 12:02 PM   #12
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I would think about this

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Old 05-16-2021, 07:17 PM   #13
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+1 on the suggestion for a custodial account for each child.

As long as the three $10k checks do not exceed $15k per child per donor per year, there should be no tax to the parent of the child/donee, or the child/donee. Because you used the word "parents" I assume you mean your mother and father. This means each of them can donate $15k each, to each of your children, per year. This is $30k per child per year, tax free to all parties.
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Old 05-16-2021, 07:47 PM   #14
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chassis, it sounds like you are referring to the gift tax annual allowances.

I think the OP is more concerned about income tax on the kids gifts.... ie the kiddie tax.

IOW, even if the gifts are with the gift tax limits the income on thoe and prior gifts would be subject to income tax.
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Old 05-17-2021, 09:59 AM   #15
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I'd put it in VTSAX or VTWAX and tax gain harvest every year what you are allowed to per year without paying tax ($2k? in gains). Another option would be to put in a low dividend fund like the vanguard growth fund which only pays out ~0.5% in dividends each year, but ideally you'd want to tax gain harvest what you're allowed to tax free each year.
I know you said your 529's are pretty fully funded but I would consider putting it in this and then your put future contributions in UGMA/UTMA account.
Finally a third strategy would be to keep it in your name so you don't get dinged as much on your FAFSA but just earmark it as theirs for future use. Maybe once they are older with jobs, you can max out their roth's or something. The FAFSA treats money in parents name much more favorably than in kid's names.
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Old 05-17-2021, 11:37 AM   #16
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To my understanding a custodial account with capital gains is not taxed until the positions are sold/liquidated, then are subject to tax. If the positions are not sold, no tax liability.

The 3 x $10k checks are exempt for all parties from gift tax.

If the 3 x $10k checks are deposited into three custodial accounts, one account each for each kiddo, no tax liability exists until an investment is sold. To avoid tax liability, don't sell the positions and allow them to grow.
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Old 05-17-2021, 01:20 PM   #17
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But previously you claimed "This is $30k per child per year, tax free to all parties."... that is true for a while... probably 3-5 years.

That works for a while, as long as the child's unearned income is less than $1,100... then the next $1,100 is taxed at the child's rate and anything in excess of $2,200 at the parent's rate.

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Under the Kiddie Tax rule, the first $1,100 of a child’s unearned incofundsme qualifies for the standard deduction. The next $1,100 is taxed at the child’s income tax rate. A child (or young adult’s) unearned income beyond $2,200 is taxed at the parent’s normal tax bracket.
After a 3-5 years the child's balances will likely have grown to the point where dividends and capital gains distributions will exceed the income thresholds for the kiddie tax... so it works well for a while.

My bigger concern with having such large amounts in a UMGA is that once the child turns 18 you have no control over the funds and most 18 year-olds are not mature enough to handle a six-figure account.
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Old 05-17-2021, 02:31 PM   #18
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Do you have to tell the kid they have an account?
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Old 05-17-2021, 03:09 PM   #19
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Not sure if you have to but will be in their SSN so they'll get statements, 1099's, etc. unless you conive a way to keep it from them.
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Old 05-17-2021, 03:19 PM   #20
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Looks like the age of majority for a custodial account can be set to 21 or older in some states.
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