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Custodial Accounts

Question: I opened brokerage accounts for my 16 and 17 year old girls last year. I am the custodian for these accounts and the daughters had and still don't have any idea about these accounts. The older is now 18. A month ago I called the brokerage firm and requested that these accounts to be closed, but was told these type of accounts once opened, cannot be closed.... Can you advice? Thank you: AbdelFatah

Answer: There are two kinds of custodial accounts that go by the acronyms UGMA and and UTMA. The initials stand for Uniform Gift to Minors Act and Uniform Transfer to Minors Act. In essence, the two accounts are very similar although the rules are more flexible with the UTMA. Both accounts allow a child or minor to own securities. You--the adult--controls the account, but the child owns the assets. You can't take the money back or change your mind. It's their money, and they take control of the account once they reach age 18 or 21, depending on the state.

You can find a comprehensive review of the rules at www.fairmark.com/custacct/index.htm

Over the years, I've taken a lot of calls from parents regretting setting up an UGMA or UTMA. And the reason is usually the same: The realization that it's the child's money. You may have set it aside for college (a very common reason), but your child may want to buy a car with it.

However, I've also become convinced that the problem, while real, is exaggerated. For instance, most children going to college are well aware of the steep price tag and they're more than willing to contribute more than their fair share when it comes to finances.

No, I've learned that the real problem is often not talking to your children about money set aside in their name. I think it's important for you to discuss the accounts with your daughters. Tell them why you set aside the money in their name. Discuss your expectations. Listen to their ideas. Engage them in your finances and money expectations. I bet you'll be satisfied with the outcome.

01/02/08 by Chris Farrell

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Kids and Investing

Question: I started savings accounts for all three of my kids after they were born, putting a small amount of money from my paycheck into their accounts. I have about $2,000 to $3,800 in each of the accounts and think perhaps I should think about doing more than a simple savings account. I have thought about purchasing stock; some time ago, I almost purchased Pixar for Bobby, but then they remarried Disney. I thought purchasing stock may get them interested in the market and finances, etc. I also have information on the Vanguard 529 plan. My husband and I have approximately $37,000 in my 403(b) and a Roth IRA. We also have some Apple stock, but that's it besides the checking account. I am 40 years old; my children are 7, 6 and 4 years old. I would love your input. Ellen

Answer: What you are already doing is wonderful. One suggestion going forward is to divide your children's money into two pots. One pot is for a 529 college savings plan. You can invest in a 529 college savings plan in your state or any other state. And the savings can be used at any college--public or private. The savings plan is funded with aftertax dollars. But the money grows tax free.

Now, there is a fair amount of choice when it comes to the investment portfolio. But most choices involve mutual funds type options. The choice I like the most is called age-based investing. When your child is young, the portfolio mix is heavily oriented toward riskier stocks. As your child ages--far too quickly, I might add--the portfolio becomes more conservative. And the portfolio changes automatically. You don't do anything. Anyone can contribute the child's account--including parents, grandparents, relatives, and friends.

Now, here's the real kicker: When you withdraw the money it's tax-free, so long as it is taken out to pay for qualified educational expenses--like tuition. 529s even get favorable treatment under the current financial aid formula. If the money is counted at all, it's assessed as a parental asset. That means only 5.6% of it is counted in the financial aid package.

The big drawback of a 529 plan is that it doesn't really teach your kinds about investing. And that's where the second pot of money comes in. I would encourage you to buy individual stocks with your children. The stock market also opens up a whole new way of looking at the world, from the creativity of designing new products to the economic bridges linking the globe. Along the way, exploring the world of investing with your youngster might lead to another activity and conversation to share together.

Picking stocks is a lot more fun than putting quarters into a piggy bank or dollars into a savings account. What shoes are your children's friends wearing--and what company makes them? Do they prefer Pepsi or Coca Cola? Who's going to win the video game wars--Sony, Nintendo or Microsoft? Concerned about the environment? Whatever your children's passion or interest, there are public companies to research and follow on the Internet and in the newspaper.

To be sure, I have no clue whether your children will make much money, although they will probably do okay. But they have the excitement of identifying with a product, researching the company, watching the stock fluctuate, and reading articles about the company. And the Internet has truly cut down on the costs of buying and selling stocks. Have fun.

01/17/08 by Chris Farrell

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Savings for Child

Question: my wife and I just had our first child. We are wondering what sort of investment/saving plan would be the best to start for him. We are looking to invest $100 a month. Thanks. Michael, Seattle.

Answer: Congratulations. First of all, you can't go wrong putting money on a regular basis into a tax-sheltered 529 college savings plan. That said, I have one other thought. How about putting the monthly savings into a broad-based equity index fund with razor thin fees (such as the Standard & Poor's 500 index, Russell 3000, Wilshire 5000, and the like). The savings is in your name. In 16 to 18 years, you'll have accumulated a nice pot of change. You can spend it on your child's college education. But maybe your child will get good scholarships. Then you can spend the money on yourselves, or perhaps create the family trip of a lifetime. You gain a lot of flexibility with this approach.

04/04/08 by Chris Farrell

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Co-sign for Law School?

Question: I am 58 years old, a self-supporting teacher, and anxious about my retirement savings. My son at the age of 29 has decided to go to law school, and asked if I would co-sign $14,000 of his student loan package. The thought of having my name attached to a debt of any kind is distressing. Am I being unreasonable?... And what about the immediate liability? Does the $14,000 go on my credit report until it's paid? Are there any liabilities to my credit, just for being a co-signer? Thanks for your advice. This is a heart-rending situation. I don't think I can say no, but the thought of being a co-signer at my age makes me VERY nervous! Carolyn. Carlsbad, CA.

Answer: I understand the desire to help out your son financially. But I would not co-sign the loan. You're right to worry that the risk is too great, especially with retirement looming. Put it this way: I assume your son has done the calculations that a law degree will pay off over time in higher earnings and better career prospects. Assuming that is the case, the debt burden is well worth taking. Time is on his side, and he should absorb the risk of something going wrong. You shouldn't be on the hook financially.

To be sure, one advantage of you cosigning the loan is that he will probably get a better rate on the loan. Again, it's really a question of whether the investment in a law degree will pay for itself. You could always make a small private loan to him on your home to help him out with an understanding that he'll pay you back later on.

05/20/08 by Chris Farrell

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