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Personal Finance

How Do You Title Your Children’s Investments or Savings Accounts?

by Evan July 21, 2014

Twice in the span of a week I was asked my thoughts on titling of children’s assets.  It wasn’t asking how they should invest their children’s investments, or more specifically, their clients’ children’s assets, but rather how should the accounts be actually titled.  I am of the opinion that money can do good things and money can do bad things, so the actual titling of the assets is a very important issue to consider.

It should be noted that even the term “children’s investments or savings” may have different meanings to different people.  In my particular case I am referring to money that I am gifting my son (i.e. I am not looking for it back), and gifts made to him by others wherein they felt it was alright for me to keep tabs on it for the next two decades (at least two decades – as discussed below).

What is a Uniform Transfer to Minor’s Account?

An UTMA account is one which a custodian operates a child’s savings or investments, or as investopedia puts it,

An act that allows a minor to receive gifts such as money, patents, royalties, real estate and fine art, without the aid of a guardian or trustee. Under UTMA, the gift giver or an appointed custodian manages the minor’s account until the latter is of age (usually 18 or 21). The Uniform Transfer to Minors Act also shields the minor from tax consequences on the gifts (up to a specified value).

It is a very simple and natural way to set up the account.  The common thought process is, “It is their money I’ll act as some type of fiduciary-custodian for it and when he or she hits 21 it is theirs.”  However, I don’t believe that is in the best interest of the child.

Why I Don’t Like UTMA Accounts

There is one minor reason and one very major reason why I dislike that type of set up (as well as the UTMA’s cousin the 2503(c) trust account).  The minor reason has to do with college planning.  Under current law assets in an UTMA are counted as a student’s assets for purposes of financial aid (as opposed to a parent’s assets).  When calculating eligibility for financial aid it is much more detrimental to have assets in a child’s name.  This is a huge deal for most.  So why is it a minor one reason? Only because the next reason I dislike UTMAs is so much more important.

In most states the UTMA becomes the property of the child at age 21 (there are a few States which have held onto the 18 age).  Do you think “21 year old you” should have received any amount of money? How long do you think you would have held on to it before it was gone?  Maybe it is because I am surrounded by children under the age of 5, but this seems like a much more pressing issue than financial aid planning.

How I have Titled My Son’s Assets?

My son’s savings account is titled jointly between The Wife and I (and appropriately and clearly labeled as such in our easy to use Capital 360 Account) while his investment account is titled in my name alone.  The investment accounts I set up for my nieces are set up in my name with one of their parents as beneficiary should I prematurely predecease (the parents also get a copy of the statements).  This type of arrangement only works if you really see yourself as a fiduciary in the strictest sense of the word.

My goal one day is to use the accounts as either teaching tools or to hand over clear and free one day, but that day will be when The Wife and I decide he is ready (or in the case of my nieces – when their parents decide).

The obvious negative regarding this type of set up is that I’ll be paying tax on those investments until control is fully relinquished.  Unfortunately,  the accounts aren’t large enough to worry about the unrealized gains just yet (and the way the kiddie tax laws are set up right now it isn’t going to matter all that much in the future).

How have you titled your Children’s Savings and Investments?

July 21, 2014 7 comments
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Personal Situation

Sometimes Ignoring Finances is Best

by Guest Post October 9, 2012

I haven’t posted in a few weeks because life has gotten serious (that’s the only way I can describe it.)  I have gotten into such a great routine with finances and have become quite disciplined in sticking to our budget that it usually seems second nature to me.  I like this because saying no to that impulse spending is easy and never actually affects my life negatively.  Unfortunately, in September I found out that sometimes not indulging in the needless things can be detrimental.

I am 28 weeks pregnant with my 4th pregnancy.  The first 2 ended in cesarean sections for reasons that have no effect on future pregnancies.  The 3rd one was a miscarriage. The current pregnancy is moving along nicely and all signs, so far, point to a healthy uncomplicated birth.  Yet, for 14 weeks I have been struggling to find a care provider who doesn’t want to just cut me open again even though they have no legitimate medical reason to do so.

Trouble Finding A Birth Center or Doctor Who Will Perform VBAC

I have been getting my prenatal care at a birth center but unfortunately for insurance reasons they are unable to care for me after 28 weeks and do not preform VBACs, vaginal birth after cesarean.  Well I’m 28 weeks pregnant and no doctor I have talked to will even let me attempt a natural birth.  Outdated information of the risks of a uterine rupture and liability reasons are preventing them from seeing that a c-section is major surgery with just as many, if not more risks associated with it than a VBAC.  I’ve even considered having a homebirth, which I don’t particularly want but will do if I have no other options.

All of this has been extraordinarily stressful and attempting to deal with it while also sticking to a budget and trying to accomplish my September goals nearly drove me to a mental breakdown.  After choosing to eat out for a third time in one week because I was too upset after another doctor rejection to cook anything, I started beating myself up for blowing our budget.  This only caused me to become even more stressed out and start nit picking on all the things I hadn’t done yet that month.  It wasn’t until my best chance at a VBAC informed me they’d be out of town the week I was due that I realized finding the right provider for me was the only important thing right now and no amount of budget breaking should matter.

I needed to rid myself of any other stressors for my health, my unborn child’s health, and to clearly figure out how I was going to get the birth I wanted.  If cooking wasn’t appealing to me then we ate out.  Writing a blog post about money wasn’t happening because I didn’t care about money.  If buying my son a book made him happy then I would have spent $100 on it, luckily it only cost $8.  But the point is, I realized money isn’t important right now and I have a healthy emergency fund that can allow me to blow a little money and ignore our budget while I figure out how to handle the important things in my life.

Sometimes Life Forces you to Throw out the Budget

I’m not saying that after every stressful work week that shopping spree you go on is justified; but I am saying that sometimes it’s more important to loosen the belt around your budget and just let some spending be okay.

Readers: What occasions in your life have caused you to throw the budget out the window?  Do you feel good about that decision or not?

October 9, 2012 6 comments
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Insurance

Why I Purchased Whole Life Insurance on My Child and Why I think EVERYONE Should Consider Doing So

by Evan August 22, 2012

When Jeff Rose asked me to partake in his Life Insurance Movement I cringed and ignored it at first glance.  I disagree with 97% of bloggers and personal finance when it comes to life insurance.  I believe that when it comes to life insurance the majority of people simply regurgitate so-called experts as opposed to stepping back and critically thinking about the subject.  One area in particular is when it comes to purchasing life insurance on a new born or infant.  First we will look at logical reasons why everyone should consider purchasing permanent life insurance on a child, and then we will look at my actual example where I purchased whole life insurance on my boy.

I should specify that the type of policy I am referring to throughout this post would be a policy sold by a well established mutual company for a six figure plus death benefit (i.e. not a $25,000 policy seen on day time television).  I should also mention that like my disclaimer indicates I am not providing any legal, insurance or financial advice. 

Logical Reasons Why I am Purchasing Permanent Life Insurance On My Child

I had this discussion with The Wife way before my boy was born (but already after the sting of losing what I thought would be our first child); she, like most, thought it was morbid and unnecessary.  I even blogged about the conversation we had about buying an infant policy on my child. Notwithstanding, I turned her based solely on the logical arguments below (numbers which are not her thing came later).

Replacement of Income

I often hear the response, “life insurance is for the replacement of income and your child doesn’t earn any money.” I am not sure about you but I am not going to work if something happened to my boy.  For how long? I  have no idea, but that should be my choice and not predetermined about the amount of liquid cash in my bank account.

When I first wrote about my decision to purchase life insurance on my child I received a moving comment,

I just wanted to share some insight on the topic. I just recently lost my newborn son and it was devastating!! I am the mother of three other children and when i had to abruptly leave work and stay in the hospital, it affects not only me but my whole family financially. Now I do carry term life insurance on my children through my job and when you have a baby you would add them on your policy within thirty days after birth. From my own personal experience you need time to grieve and let things sink in. For weeks I felt like I was In the twighlight zone,nothing felt real. The point that I want to make is that when something happens untimely and involves such a delicate matter its very hard to deal with. the last thing you want to worry about is finances. It makes the situation much worse.

In that particular reader’s situation it was an employment benefit which actually didn’t pay her a benefit because the child did not survive 14 days.  Very heartbreaking.  Notwithstanding for an amount that is less than most people’s cell phone bill you can get a great policy by a mutual company that has been around longer than some States (and may be even better rated than some municipalities) that allows the majority of people to receive their annual salary in a lump sum.

Guaranteed Insurability Later in Life

I have a really good buddy who, at the age of 19 developed Type 1 Diabetes.  Life insurance was the farthest thing from his mind.  Fast forwarded 9 or so years when he had his first child.  Now his term policy costs 6x the amount of a preferred rated male who is the same age.  SIX TIMES.

If his parents had purchased him the type of policy I am talking about they could have insured a way to increase the death benefit to account for two decades of inflation.  If your agent is worth his commission he will insist you purchase some type of Guaranteed Insurability rider which will allow your child (or you) increase the death benefit at certain times.

For example, my son’s policy (details below) can increase in death benefit 3 times for an amount of $125,000 each time WITHOUT MEDICAL UNDERWRITING.

Let’s Look At the Numbers of Insuring an Infant

Part of my professional position provides me with the opportunity to illustrate policies.  The company I work for is irrelevant as the product is not uncommon and as such you can talk to more professionals to find a similar result:

  • Purchased a few months after my son was born
  • $50 or so a month is the premium
  • For Cash Account I used 2% NET to be generous
  • For Investment Account I used 5% NET (so depending on your tax bracket we are in the 5 to 8% range gross)
Age Year Cash Surrender Value Death Benefit Cash Account (2% NET GROWTH) Investment Account (5% NET GROWTH)
1 1 $0 $149,706 $612 $630
2 2 $55 $149,706 $1,224 $1,262
3 3 $472 $149,889 $1,849 $1,925
4 4 $925 $150,111 $2,486 $2,621
5 5 $1,405 $150,320 $3,135 $3,352
6 6 $1,920 $150,700 $3,798 $4,119
7 7 $2,458 $151,151 $4,474 $4,925
8 8 $3,027 $151,650 $5,164 $5,772
9 9 $3,624 $152,232 $5,867 $6,660
10 10 $4,253 $152,874 $6,584 $7,593
11 11 $4,872 $153,575 $7,316 $8,573
12 12 $5,515 $154,304 $8,062 $9,602
13 13 $6,188 $155,132 $8,823 $10,682
14 14 $6,885 $156,001 $9,600 $11,816
15 15 $7,606 $156,891 $10,392 $13,007
16 16 $8,409 $158,439 $11,200 $14,257
17 17 $9,286 $160,483 $12,024 $15,570
18 18 $10,260 $163,139 $12,864 $16,948
19 19 $11,342 $166,377 $13,721 $18,396
20 20 $12,531 $170,076 $14,596 $19,915
21 21 $13,781 $173,807 $15,488 $21,511

No, the insurance amounts are not guaranteed.  There are minimum guarantees but I didn’t chart them out since the cash and investment account are NO WHERE near guaranteed either. At his 21st year of life I will have:

  • About $1,707 less if I am investing in a cash account
  • About $7,730 less if I am investing in an investment account

First and foremost, creating a sinking fund in case something were to happen obviously proves impossible.  21 years from now, ignoring inflation, I still would barely have anything to take off of work.  For the “cost of money” prices above ($1,707 and $7,730) prices above I have have hedged the albeit small risk of my child dying (and subsequently not working for a bit) as well as the guaranteeing his will be able to obtain afford life insurance for the sake of my familial line for 21 years.

I have also created flexibility.  Lets say I was done paying for this policy I have options:

  • I can reduce the death benefit to have a paid up insurance product
  • I can remove the cash and use for his/my benefit
  • I can keep adding and watch the power of compounding take over.

I hope I will inspire at least one or two people to call a trained professional to check out an infant or child policy.

August 22, 2012 19 comments
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Investments

How I Invested my Child’s Money

by Evan July 16, 2012

Almost four months ago I questioned how I should invest my child’s money, but I never ended up doing anything about it until recently.  I felt strongly that this was his money as he received it from very generous family members and friends who cared about him so I was/am acting as a de facto fiduciary.  This left me with the question of how I should handle his money.  I provided four choices and wanted to hear from both parents and non-parents about their opinion.  As a reminder the four choices I provided were:

  • Leave it all in cash as it isn’t mine and I shouldn’t touch it
  • Put it all in an index fund tracking the broad market as this is money he isn’t using for 20 or so years
  • Put it in a low cost dividend/fixed income fund so it would be low risk but more than just bonds or cash account
  • Put it all in bonds

I am almost ashamed that despite some fantastic comments I failed to act until the last few weeks.  Before telling you what I did, I will discuss what I decided against and why.

How and Why I Did Not Invest my Child’s Money in Certain Ways

I should have mentioned in that original article that The Wife and I decided that the gifts he received should be “his” and that college should be our, (The Wife and I), responsibility.  As such, putting the money into his 529 plan was not an option.  Since that was off the table I didn’t discuss the fact that just putting it in a 529 wouldn’t have really solved the post’s question anyway since a 529 is just an account to hold assets and not an investment decision in it of itself.

With the 529 off the table I read and responded to each comment as I really was looking for someone to sway me one way or another.  I quickly decided against the cash idea.  As I saw the monthly interest deposit to his account I just felt like I was doing him a disservice.  Inflation could make him think that his family and my friends’ gifts were anything but very generous. 

I really wanted to get into buying individual bonds for him because I felt like it was taking a conservative approach, while giving him some upside yield.  I quickly found out that buying an individual bond takes a lot of research just as buying an individual stock does.  That caused a bit of a paralysis by analysis and it was the main reason it took me so long to act in his stead.  After I overcame my inertia I learned that my broker required me to buy bonds in lots of 5 with a minimum purchase of $1,000 this would really limit his diversification and took me to an uncomfortable zone quickly.

How I Ended up Investing my Child’s Money

I was not comfortable just putting it in the market and closing my eyes nor was I comfortable just buying a bond fund and hoping it all worked out.  As such, like most things in my life I took a near middle ground approach that leaned toward the more conservative side.  I created a 70% Bond / 30% Stock Portfolio.

Bond Portion of the Portfolio

Once I decided that the larger portion of the portfolio is going to be put into a conservative bond fund I had to research my options.  An important part of the equation was trying to avoid my taxable income for the next decade and a half so I primarily researched bond funds that are likely to provide Federal and State Tax Free Income (in my case New York State Municipal debt).

Once I compiled my list, I eliminated those with a load (since I didn’t feel like I should be paying to invest as I was doing the research myself) and put them in order of fees.

I ended up choosing a vangaurd fund and was charged an initial fee of $75 to buy the mutual fund through my broker.

Stock Portion of the Portfolio

I had to find a place for the remaining funds.  My broker provided an S&P 500 Index ETF that I could purchase with no fees and had expenses of .09% I figured I would just go with that option.

With his portfolio set up it is on auto-drive until he receives more gifts.

How have you handled your children’s money?

July 16, 2012 21 comments
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Life Insurance

Why I Will be Purchasing Life Insurance on My Newborn Baby

by Evan February 16, 2011

I distinctly remember the pain and helplessness I felt when The Wife and I lost our first baby in utero to a blighted ovum, and that wasn’t a child I had the honor of raising. I am not sure how I would handle if anything were to happen to my son, but I do know that work and this blog (my two main sources of income) would certaintly take a back seat.  Only if there was a way to protect one’s assets in case of an unforeseeable and untimely death…oh wait there is!

Protecting a Parent’s Income with Life Insurance on a Child

I have approached the subject of buying life insurance on a child with The Wife prior to the birth of Baby Boy, and she made it pretty clear that she thought the whole topic was morbid.  Although she is also the same The Wife who thought it was morbid when I increased my insurance when Baby Boy was born…said she would rather me alive.  Poor The Wife didn’t get that so would I lol.

While I think there are other uses for life insurance, most people won’t argue with me that a main purpose of life insurance is used to protect one’s income in case of untimely death.  What is more untimely than a child dying?  I couldn’t imagine anyone really arguing against this reason if you have the income to purchase a policy, but there are additional reason besides protecting the income lost from taking time off of work from a child’s death.

I am obviously not talking about one of those cheap $20,000 policies.  We are talking about a six figure death benefit with various riders.

Reasons to Purchase Life Insurance on a Child

Beyond protecting income I think there are a few other fantastic reasons to purchase life insurance on a child:

Guaranteeing Insurability

I have a really good friend who was diagnosed at age 19 with type one diabetes.  Want to know what his life insurance costs? His term policy costs approximately 7 times an insulin producing 29 year old.  Does he have a choice? With a mortgage, significant income producing ability, and a 7 month old…No he doesn’t have any choice so he pays the bill monthly.

After looking at several policies and life insurance rates, the policy I will be purchasing for Baby Boy will allow for an increase of death benefit at certain policies anniversary dates.  So God forbid there is a speedbump in Baby Boy’s health he’ll have insurance that will increase as he gets older.  This insurance can be transferred to him without any income tax ramifications and most likely gift tax issues so he can use it for the benefit of his family.

Cash Value from Permanent Policy Can be Used Later in Life

The company I work for does not sell term policies to children, nor would I even want one.  The cash value can be used for:

  • College
  • College Graduation Gift
  • A wedding
  • A wedding gift
  • Never used because he now needs the seasoned life insurance policy

At age 22 with the riders I put on I will have a 0% Internal Rate of Return.  If I were to remove those riders the internal rate of return would be about 3% which isn’t terrible on a cash account of the course of 20 years.

Choice with Life Insurance on a Child

For me, it is all about choice.  For less than what my cell phone costs a month ($50) on my 2 month old I will have:

  • A policy that will return my money at approximately age 22 (0% Internal Rate of Return)
  • A policy that provides me the choice of increasing his death benefit even if he were no longer insurable
  • A death benefit that will provide for The Wife and I while we mourn so work and income can come in a far second as compared to caring for our family
  • A policy that doesn’t have to be paid if he were otherwise able to work and can’t (it is called waiver of premium)
  • Peace of Mind
February 16, 2011 42 comments
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