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What different options are available? What are the pros and cons of different types of accounts?

update, in response to Joel Spolsky's request for more info: I live in the U.S., the shares are GE. Once I open the account it would be for grandparents, myself, and others to deposit money into. My objectives are to conservatively grow the money to provide my son with more opportunities (higher education or other) in 16-20 years.

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    What country to live in? What are your goals? What kind of shares? Why do you want to transfer them? – Joel Spolsky Dec 9 '10 at 3:26
  • @Joel Thanks for asking relevant questions - I have updated my answer – David LeBauer Dec 9 '10 at 3:46
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The most common way to handle this in the US is with a UTMA account.

UTMA is the Uniform Transfers / Gifts to Minors Act ("UTMA" or "UGMA") which is a standard model law that most states have passed for special kinds of accounts.

Once you open an account, anyone can contribute. Usually parents and grandparents will contribute $13,000 or less per year to make it a tax free transfer, but you can transfer more.

The account itself would just be a standard brokerage account of any sort, but the title of the account would include your son's name, the applicable law depending on your state, and the name of the custodian who would control the account until your son turned 18.

When your son does turn 18, the money is his. Until then, the money is his, but you control how it's invested.

I'm a huge fan of Vanguard for UTMA/UGMAs. You may prefer to diversify a bit away from one company by selling the GE shares and buying an index mutual fund so that your child's education is not jeopardized by a rogue trader bringing down General Electric sometime in the next decade...

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A UTMA may or may not fit your situation. The main drawbacks to a UTMA account is that it will count against your child for financial aid (it counts as the child's asset). The second thing to consider is that taxes aren't deferred like in a 529 plan. The last problem of course is that when he turns 18 he gets control of the account and can spend the money on random junk (which may or may not be important to you).

A 529 plan has a few advantages over a UTMA account. The grandparents can open the account with your son as the beneficiary and the money doesn't show up on financial aid for college (under current law which could change of course). Earnings grow tax free which will net you more total growth. You can also contribute substantially more without triggering the gift tax ~$60k. Also many states provide a state tax break for contributing to the state sponsored 529 plan. The account owner would be the grandparents so junior can't spend the money on teenage junk.

The big downside to the 529 is the 10% penalty if the money isn't used for higher education. The flip side is that if the money is left for 20 years you will also have additional growth from the 20 years of tax free growth which may be a wash depending on your tax bracket and the tax rates in effect over those 20 years.

  • Are there self-directed type of 529 accounts that could hold shares of specific companies, e.g. GE as in this case? – Chris W. Rea Dec 11 '10 at 13:50
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    No there aren't any options for self directed 529 accounts that I am aware of. I took the question to mean how to best transfer assets to the grandson. If you have to hold individual stocks you will want to use a UTMA. – stoj Dec 13 '10 at 17:14
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    Daughter starts college in the Fall, and grandparents have 529s for her. We found out much too late that the rules have changed somewhat. You are correct that grandparent 529s are not included on FAFSA. However, for the last few years the payments made from 529s not in the student's or parents' name are counted as non-taxable income on the following year's forms. While parental 529s are considered as parental assets, which are figured at about a 6-7% marginal rate towards Expected Family Contribution, non-taxable income is "taxed" at 50%, thus potentially reducing aid after freshman year. – Rick Goldstein Mar 27 '13 at 21:09
  • My previous comment was just to say: better for grandparent to give money (within gifting limits) to the parents and have the parents open the 529. – Rick Goldstein Mar 27 '13 at 21:17

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