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I have 3 nephews and a niece, all under 6yo. I'm single and in a position to put aside ~$500/yr/child. I'd like to do this with securities and take advantage of some compounding.

I'm not ruling out a 529 plan, but I think my parents are funding that to some degree. At this point the children's families are in pretty good financial situations as far as I can tell such that affording a decent education at a state school shouldn't be a problem. I also know the children are named in my parents will and I'm assuming each child will receive ~$45k+ upon my parents death in ~20yrs.

On the flipside, I'd like to set up a UTMA/UGMA but don't like the fact that the money in these accounts would count against them when applying for financial aid for college. I have no clue how detrimental such assets might be in getting aid. If I personally invest the money and simply 'earmark' it for each child back of the envelope calculations would put the money set aside at probably somewhere close to or below the Gift Tax Exclusion(currently $14,000 limit). (Along those lines is the Gift Tax Exclusion only in regards to cash? Or does it cover gifting anything of a certain value?)

I'd also like to prevent them spending the money on fleeting material possessions instead of using it wisely i.e. keeping it invested or for a house downpayment etc etc. I realize that this is more of an education and social temperament thing but still I'd like for them to value and use the money wisely or to sit on it until they are set up so they appreciate the value of the gift. I'd like to instill some sort of financial literacy/education in the gift and not end up further feeding a credit card abuser, god forbid that happens.

I'm therefore interested to find out what other good ways there are to gift them the assets. Can I gift securities to them such that I don't incur capital gains taxes?

EDIT: The Gift Tax comment was mentioned because based on the amount I plan on putting away each year I could simply manage the money outside of a 529 / UTMA / UGMA and give them a one-time lump sum.

I'm curious if I've missed any other options as to how to gift them money.

I'm also curious about the pros/cons of each method. From what I can tell UTMA / UGMA gifts them money such that taxes are minimized but which negatively impacts their financial aid prospects. Also they may not mentally ready for such a windfall. A 529 has the pros of UTMA / UGMA (from what I can tell) but is reserved simply for education (and can be shuffled to one of their cousins if need be). Managing money outside would give me greater control as to timing of the gift, but if invested in securities would result in a tax bill subject to my tax rate.

To reiterate:

A) What other options are out there to gift them money/securities/assets etc

B) What are the pros / cons to each so I acn pick which is the lesser evil I want to pursue

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    What's your main goal, minimum fees, minimum taxes, market risk or safety, financial education, tie the use to a specific goal or to at least prevent an 18 year old from buying a Maserati (as my brother trolled my mom over a trust set up by our grandmother)? I can't tell what you are prioritizing, and you've alluded to all of these – user662852 Sep 13 '16 at 12:10
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    You need to define "efficient" and you need to define more clearly what your goal / intent is. – Anthony McCloskey Sep 13 '16 at 14:57
  • I would wait a while longer and see how the kids turn out. No offense, but one might be a crackhead and another might be drafted into the NBA. Assuming the gift tax exclusion still exists, you can give them plenty later if they need it. In case you don't already know, the $14k limit is per year per person. If you get married later, you could effectively gift $28k per child per year. – James Sep 13 '16 at 14:57
  • @James Or be a crackhead and drafted into the NBA. – dg99 Sep 13 '16 at 16:32
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    Can you clarify your comment about the Gift Tax Exclusion? Because that is an annual limit, not a lifetime one. Are you thinking of the alternative of holding the money in a self-owned account and only gifting it when the kids graduate college/get married/hit some other life event? That would be the only way that the GTE would kick in. – Rick Goldstein Sep 13 '16 at 17:38
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I think you have already outlined for yourself most of the pros and cons of each method of giving. It sounds to me like you have some desire to control how the money is spent, or at least reserve the right not to give it to a child who will waste it (according to your definition).

If you set up an UTMA/UGMA account, or just give the money directly each year as a birthday gift, you are surrendering control of the money. It's a gift and is no longer yours to direct.

If you set up a 529, you at least restrict the money to a particular, useful purpose. Moreover, if you retain ownership of the 529, you can take the money back, albeit with a tax penalty to yourself.

If you do hold a 529 in your name, but for a child's benefit, there are a couple of things to consider with respect to future financial aid (this is from recent experience--my in-laws have 529s for our children, both of whom are currently in college). A 529 not owned by the student or the student's parent is not reported as an asset (of the child or the parent) on the Free Application for Federal Student Aid (FAFSA). However, once such a 529 is used to pay college expenses, the amount of those payments does get reported on the following year's FAFSA, and counts as untaxed income for the purposes of figuring the Expected Family Contribution (EFC). Untaxed income is assessed towards the EFC at 50%. In contrast, parental assets are assessed at around 7%, if I recall correctly, and student assets at around 35%. Student-owned 529s are assessed at the rate of parental assets, which is an advantage. If the amount you will set aside is less than the cost of one year of college, you can avoid the disadvantage of the untaxed income assessment by just using the entire 529 for the final year of school, since there will be no FAFSA for the following year.

It occurs to me that there is one other way you can give to them that you did not mention, and may make you more comfortable in terms of encouraging some positive behavior. Namely, save the money in a self-owned account, then, when they are old enough to get a job that provides a W-2 showing declared, earned income, you can use the savings to fund a Traditional or Roth IRA for them, up to the limit allowed each year, until the money you set aside is exhausted. The Roth is a better long-term savings vehicle, but the Traditional would carry bigger penalties for early withdrawal and would therefore be less tempting to draw on.

  • Thank you! I like the idea of putting the money aside in an account for them and then flipping the money over to them to fund an IRA. I hate to sound super controlling, but I was gifted money that I, in retrospect, felt like I wasted instead of investing/using it wisely. Therefore, I'm trying to think of ways to prevent them from following in those footsteps. – N Klosterman Sep 14 '16 at 23:47

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