AssetBuilder Inc. Registered Investment Advisor - Simple Investing. Smart Future.

Mr. Burns,

My wife dug up an article you wrote about investing $11,000.00 a year for five years for your grandchild and this would make him a millionaire at 56 years of age. I was interested in finding out what the tax burden was, does the invested money get taxed on the child or the person investing the money? Is the account in the child's name? Is it a trust? Do the people at Fidelity or Vanguard know what this is if I called to set it up? Thank you for you assistance.

John

posted from email 

Is this same plan a good idea for parents to help pass part of their estate to their adult children say 30-40 yreas before parents would die or would it be better since all adult children and their spouses work and probably qualify for a Roth IRA --to open one for those who qualify--the proceeds of which would be tax-free basically...Would they have to declare the money as income or just use the fact that they have had more than 10,000 in income during the year?

We have a daughter and SIL (29/33) w/no children at this point who earn more as a couple and have more in savings. He has a 401K with his company but have no idea of the amount. Mu daughter has some money in a teacher retirement account. I think after taxes this year their income might be over the Roth limit but don't know for sure.

Our son (32) plans to marry this March. He and his fiance have debt from school loans from getting their MA's and credit cards that they are trying very diligently to pay off. He has taught or gone to school since high school, and we know he has almost nothing in savings.

We are financially in a position to give each one the maximum tax-free gift this year. Whether we choose to give all or a partial amount we have not decided.  We also don't know if it would make more sense instead to help our son pay off at least part of his deb with the money. He is not a good money manager and has had to move home once after college to pay off considerable credit card debt.  His fiance seems to be more disciplined, but she has even more college debt than he does becasue her family did not help her with her MA.

So is setting up a Roth tax-free better than the low-cost variable annuity with Vanguard? Although my husband and I anticipate having about 4-4.5 M to retire with, he is hoping to take early retirement by the middle of next year when he would be 59 and half. Making the gift this early is a way to ensure that we can start to provide some sort of estate/inheritance for our children. Is this a good idea?

 I think it's a good idea to help adult children as early as we can and as often as we can. Exactly how we do it is the complicated part.

Using a portion of the annual gift exclusion to fund an adult childs' Roth IRA is a good thing for those who are established and good money managers. But I think it is better to provide something that provides a benefit today, such as helping pay down education debt. The sooner the debt is paid off, the sooner the income devoted to paying it off will be available for something else.

What we try to do with our kids  is to open a world of choices for them. Giving with a purpose in the now opens choices. Giving for the distant future MAY open choices long after we're gone, but it doesn't do much today.

 Personally, I like the idea of using gift money to make thing possible that would otherwise not be possible. This starts with down payments for purchase of a house, extends to help paying off education loans, and goes still further to paying for lessons and activities for grandchildren that might not be in the budget of a 30-something couple.

Scott
 

I am visiting my original question and Scott's reponse to ask for clarification--a little late I know but

we gave them money at the wedding and they did use it to pay down part of their debts--hopefully a significant portion--they have not really shared their total financial situation (and we have not really asked)...but paying an amount directly to the lender/debt holder would not count toward annual gift amount would it?  At least I don't think it would...

and what are your opinions/experiences with establishing life insurance trusts as effective tax-beneficial vehicles for covering estate taxes or just bequests ...

from what I have read it seems that the beneficiary cannot be changed once established (unless s/he dies first I guess), that the permiums count toward the annual gift limit, and that the beneficiary pays no tax on receipt but I am not sure about who/what is responsible for the estate taxes generated by the death of the insured...which initiates the payout...

are these only efficient vehicles for fairly wealthy individuals/estates?

could you refer me to a clearly written explanation of the method and +/- points of needing/using one?

John,

It's really your option. You could, for instance, set up an account in the child's name in a low cost variable annuity such as the one offered by Vanguard. This would provide tax deferral and efficient long-term compounding. It would also promote an "out of sight, out of mind" aspect that might hinder premature spending of the money.

Another option would be to set up an account in the child's name using low cost, tax efficient index funds invested entirely in equities. In this case taxes would have to be paid each year but the amount would be tiny. Even paying taxes, however, it could accumulate to more over a long period because our tax code has historically taxed capital gains at lower rates than income from wages, interest, or dividends.

Scott