Best investment for grandchild?

[Broland]

I want to set up a long-term investment for a 3 year old grandchild. The money to invest will be non-qualified and I definitely don't want to burden her with my tax rates. My "private client" person was of little value (nothing I didn't already know) so I'm hoping someone on this forum has some ideas how to best set it up.

My preference is an S&P500 ETF and just "let it ride" for the next 15 years. I'll be adding money monthly. I don't want to have to report anything from this investment on my taxes ... I won't "prime the pump" with my thoughts, so any thoughts are appreciated! Thanks.

If it matters ... I have no "income", just live off investments.

 

[rickster55]

Since you don't want to report this investment on your taxes you would need to gift the money to the child via an UGMA/UTMA brokerage account. This account is the least restrictive when it comes to using the money. You can open the account and be the custodian since you are a grandparent. The child reports the dividends and capital gains on their tax return in years that they exceed the standard deduction (probably won't have to file a tax return until they get their first job).

If you don't mind waiting until your demise for the kid to get the money, you can open a regular taxable brokerage account in your name with the child as the beneficiary. Invest in VTI or VOO and the income to you should be less than 2%/yr with most being Qualified dividends taxed at long term rates. The advantage to this strategy is that when this account passes to the child at your demise the basis is reset to current market value for the child, i.e., no taxes due on all those capital gains!

Could even do both of these options.

 

[DrRoy]

I would also suggest VTI over something like SPX for the broader market exposure.

 

[erkevin]

I would go VTI, or VT if you want international exposure.

 

[athena53]

My grandchildren's 529s are mostly in the S&P 500 but I may diversify eventually. They're 9, 3 and 6. I like the 529 vehicle because NOBODY pays taxes on the gains as long as it's used for educational purposes and there's no tax reporting needed in the meantime. The downside is that many plans have a very restricted list of investments although Fidelity has one with SPY and other index funds.

 

[pb4uski]

... If you don't mind waiting until your demise for the kid to get the money, you can open a regular taxable brokerage account in your name with the child as the beneficiary. Invest in VTI or VOO and the income to you should be less than 2%/yr with most being Qualified dividends taxed at long term rates. The advantage to this strategy is that when this account passes to the child at your demise the basis is reset to current market value for the child, i.e., no taxes due on all those capital gains!...

I'm thinking about doing something like this for DGS... may put it all in a 3x leveraged S&P 500 bull ETF like UPRO or SPXL and let it ride and see what happens.

If it's a home run then I'll be the kid's hero and genius grandpa but if it is a total fail then he'll never know. [emoji16]

 

[FREE866]

I'm thinking about doing something like this for DGS... may put it all in a 3x leveraged S&P 500 bull ETF like UPRO or SPXL and let it ride and see what happens.

If it's a home run then I'll be the kid's hero and genius grandpa but if it is a total fail then he'll never know. [emoji16]

hahaha


I was just thinking the same thing.....I mean, if you KNOW it cant be touched, barring a cataclysmic collapse of society that kid is gonna have a truckload of money if you put it into UPRO

 

[jollystomper]

If you don't mind waiting until your demise for the kid to get the money, you can open a regular taxable brokerage account in your name with the child as the beneficiary. Invest in VTI or VOO and the income to you should be less than 2%/yr with most being Qualified dividends taxed at long term rates. The advantage to this strategy is that when this account passes to the child at your demise the basis is reset to current market value for the child, i.e., no taxes due on all those capital gains!

Could even do both of these options.

Is there any concern if your demise occurs before the child reaches majority age? Might that give them access at a young age?

DW and I are also looking into investing for our grandchildren (both under the age of 4) so this is a time thread.

I have a concern about 529s given the current Maryland 529 issues that have account holders up in arms (short story, issue with calculating interest, some accounts showing less that what they showed a year ago, accounts partially locked use to issue, etc.). I know this is just one state, but it raises the issue of the type of exposures one can have is using that vehicle.

 

[sheehs1]

Because I don't know what my three grandchildren will do regarding college or even what college will look like, I decided to set up 3 Custodial UGMA Accounts in each of their names with my daughter as Custodian (not me). If or when there are any taxes, she and my son-in-law will pay any small tax as the years roll out at their tax rate (not mine). I have access and can see these accounts under my brokerage since I have trading authority. I plan on additional deposits yearly. Grandchildren are currently 4 years old, 7 years old and 9 years old (yes, the years go by fast! )

Also, because I don't know when something may happen to me and the accounts currently are not fully funded, I set up another Retail account in my name and transferred quite a bit of money into it (several hundred thousand). It is still my money if I need it...but if I don't, it will be theirs. In setting up the account, I added a Transfer on Death designation equally to each child with the specific designation that it will automatically transfer into each of their UGMA custodial accounts at my death. All my daughter has to provide is the death certificate.

For now I have used zero coupon bonds, some selected stocks and cash. The bonds come due with their first year of entering college. Then their second year, etc. It was more important to me that they know what they have than guess at returns over the next 15 years. They can use it for college or simply to start their lives. As the years roll on, I may do other investment types for them.

I remember the years periodically when 529's tanked along with the stock market. Yes, I am giving up the tax deduction for deposits into 529's but don't really care. Plus my daughter is easily overwhelmed with investments. Didn't want to burden her with navigating paperwork or whatever is necessary with 529's.

 

[Dash man]

I have both 529 and custodial accounts set up for each of my three grandkids. Income from the custodial accounts have to be reported on the parents income tax return if it exceeds $1100 in any one year. So I sell and repurchase any stocks with gains every couple of years to keep the capital gains under $1100.

 

[Montecfo]

Not a fan of UGMA. Just seems like a bad plan to give a kid lots of money with no strings attached on his 18th birthday.

But that is just me.

 

[pb4uski]

Is there any concern if your demise occurs before the child reaches majority age? Might that give them access at a young age?...

Fair point. Perhaps a simple trust with DD as cotrustee and DGS as beneficiary once he turns 18 or 22 or whatever. I wouldn't mind it being used for wheels once he gets his license and for post-secondary education or training.

 

[sheehs1]

Not a fan of UGMA. Just seems like a bad plan to give a kid lots of money with no strings attached on his 18th birthday.

But that is just me.

You can restrict UGMA accounts and they can remain under the Custodial requirements to age 26, which I did with paperwork. You just have to get the Custodial signature (your daughter or son or whoever you designate) to sign a statement they want Custody until the child is 26 years old.
That may still be too young for some. Hopefully the money will be spent on college before that.

 

[Gumby]

How do UGMA accounts figure into the FAFSA process? Would that affect how you want to structure your gift?

 

[sheehs1]

How do UGMA accounts figure into the FAFSA process? Would that affect how you want to structure your gift?

Unless things have changed, it's reported as a student asset. But I think there are some ins and outs with 529 plans as well as they are reported as parental assets if the parent owns the account. The treatment might also be state dependent.

We were never going to get financial aid. But luckily my daughter did get discounts and grants.

 

[matjung]

I want to set up a long-term investment for a 3 year old grandchild. The money to invest will be non-qualified and I definitely don't want to burden her with my tax rates. My "private client" person was of little value (nothing I didn't already know) so I'm hoping someone on this forum has some ideas how to best set it up.

My preference is an S&P500 ETF and just "let it ride" for the next 15 years. I'll be adding money monthly. I don't want to have to report anything from this investment on my taxes ... I won't "prime the pump" with my thoughts, so any thoughts are appreciated! Thanks.

If it matters ... I have no "income", just live off investments.

I cannot comment on your taxes or those of the grandchild or its parents taxes.
I would do
50% ETF Nasdaq - for the growth

50% ETF MSCI/Vanguard Global for the Value
and rebalance every now and then

 

[Broland]

Thanks to all for the many good investment options and I'll look into some of those that I probably wouldn't have considered.

What I'm most interested in is the "how" that maximizes return without negatively impacting either of our tax situations. Thanks for those who've provided options so far...

 

[copyright1997reloaded]

Not a fan of UGMA. Just seems like a bad plan to give a kid lots of money with no strings attached on his 18th birthday.

But that is just me.

21 in some states, but the concern is valid.

I have a UTMA/UGMA for my child who will be turning 21 this year, so it will be a test of your statement.

However, my "plan" on this front is fairly simple: I will discuss with DC that how that money is handled is a test...and give DC an idea of "how much more" money will either become theirs (if they manage what has been given so far in a frugal manner) vs. the realization that if they don't the money they don't control can easily be rerouted to others.

 

[copyright1997reloaded]

OP-
One of the advantages of a UTMA/UGMA is tax GAIN harvesting. The idea here is that you take gains (each year) to increase cost basis on holdings, but limit the gains so that the child remains under the kiddie-tax threshold and leverages a 0% rate.

The above can also be useful if you have a large long term capital gain on a holding that represents too much single stock risk. Instead of gifting $, gift shares of the appreciated stock. The recipient gets the basis on the holding. You then sell a bit (leveraging their 0% rate). Obviously, getting a step up in basis on your death is a traditional way of playing this. This technique may also be useful if you have lots of appreciated assets but little cash (to gift).