Is it legal if I'm managing my family's entire wealth?

Question

My family (father, mother, and brother) have allowed me to invest their money in the stock market and other types of investments (real estate, bonds and mutual funds).

Is it legally okay to do all the investments under my name? Which means that I transfer all their funds to my bank account and then invest it under my name. Or should I form some type of company and then proceed as an investment firm?

If it is not legal/okay to invest as mentioned in above paragraph, then what are the other options in which I can invest their money.

Note: I do not care about under who's name everything proceeds, but what I'm seeking is uniformity. I want all the funds to be in one bank account (or let me know if this is not a good idea), all the tax work to be minimized and done under one person/name/entity.

I'm seeking answers from both US and Indian laws' perspective.

Answer 1

I am not going to discuss legality, because with family members you are able to give a lot of guidance and assistance without running into legal issues.

The biggest problem is that when they transfer the funds to you and you invest the money, all the tax rates and tax limits are determined by your situation; plus you have more investments than you should have so you hit those limits and brackets quicker.

For example:

In the United states a person can put $5,500 or $6,500 into a IRA or Roth IRA each year. If you combine the funds for three with your funds then you are giving up three quarters of the amount that you can invest in that type of account.

The decision regarding Roth or not depends on age and income level. But now their decision is related to what is best based on your situation.

The ability to even deduct IRA deposits would be based on your situation.

Of course for taxable accounts the tax rate is determined by your income, not theirs.

If they want you to have the ability to make investment decisions for them, then power of attorney is the way to go. The money is deposited in their name, and all the rules and tax rates are determined by their situation. You make sure they have all the information they need to login and review the accounts, but you make the all the moves within and between accounts.

Answer 2

You are opening up a large can of worms with how you are doing this.

In very positive years, you'll have taxes based on your income, potential Alternative Minimum Tax (AMT), etc. Each of the family members may be in a lower bracket, perhaps even needing to pay zero on capital gains.

Even if you are 100% honest, if you are subject to a lawsuit, these funds are all in your name, and you'd be in a tough situation explaining to a court that these assets aren't "really" yours, but belong to family.

And last, the movement of large chunks of money needs to be accounted for, and can easily run afoul of gifting rules.

As mhoran stated, a Power of Attorney (POA) avoids this. When my father-in-law passed, I took over my mother-in-law's finances, via POA. I sign in to my brokerage account, and her accounts are there. I can trade, deal with her Individual Retirement Account (IRA) Required Minimum Distributions (RMDs) each year, and issue checks to her long term care facility. It's all under her social security number - our money isn't intermingled.

Answer 3

I agree that this is a "bad idea" but I want to add in one more reason. Let's pretend your family and you are ok with all the tax ramifications and legal issues. This is still a horrid idea.

You have to deal with the What Ifs.

What if you get in an accident with your car, and then a law suit comes around and they decide to seize your assets? Again the reason isn't important—what is important is your ability to pay a critical "thing" is going to be based off accounts and money that are not yours.

So you goof up on child support and they "freeze" your accounts. Guess what? Now your family members lose access to their money, because on paper it's your money.

Keep in mind it doesn't have to be an irresponsible action that causes the issue. ID theft, for example, often results in a temporary account freeze while things are sorted out. So now your mom can't eat because "your money" is pending review.

In this situation you might even turn to your mother or father or brother for help while your accounts are frozen for 2-3 months and everything is sorted out. But now you can't because their money is tied up too.

Lastly lets assume the ID theft issue. That ID thief now has access to a big pool of money. They walk off with everyone's nest eggs—not just yours.

Answer 4

Big mistake: You are presuming trust

This is the biggest blunder I see in money handling. "Oh I'm a good person and everyone knows my intentions are good. And they're really happy with me right now, so it'll stay that way forever, right? So I can just do anything and they'll trust me."

And then in hindsight 10 years later, the person realizes "wow, I was really stubborn and selfish to just assume that. No wonder it blew up."

Anyway, to that end, your requirement that all the money be in one account and "this will simplify taxes" is horsepuckey. No one will believe a legitimate financial advisor needs that, but it's exactly what a swindler would do. And that's the problem. If anything goes wrong, their trust in you will be forgotten, some will say you intended to scam all along, and the structure will be the first thing to convict you.

Money makes everyone mistrusting.

How to do this right

Ironically, the concept is called a "trust", and there's a wide body of law and practice for Person X responsibly handling the money of Person Y. The classic example is Person Y is a corporation (say, a charity) and Person X is on the Board of Directors. It's the same basic thing. The doctrine is:

• Keep separate accounts
• The account is in their name, not yours.
• You have a contract between you and them clarifying what this is about and stating responsibilities.
• You get the right to manage their account. This is routine. It can be via an authorization letter, or simply them giving you the password.
• Document every transaction fastidiously, to make everything easy to audit. If they surprise you, you need to be able to show them immediately what's going on with their money. Our charity's Board asked a manager to show us financial statements. She balked; we said the famous last words "NOW, please" and she went crazy and deleted all the files on the computer. Obviously, she was crooked!
• You do not make money off the transactions yourself, except as agreed specifically. For instance you and they could agree you get $500/year for a management fee. Or agree you get 10% of the net gains. Etc. It's not OK to take a commission for sales; because that motivates you to handle their money to drive up fees or commissions.

Answer 5

If you go through the web pages of some online brokers, you will find out that some of them allow you to manage friends/relatives accounts from your account as a trusteer. That should really solve your underlying problem, you will need only one login, etc. (Example: https://www.interactivebrokers.com/ff/en/main.php)

If I understand it right it will even allow you to make one trade splitting the cost and returns among the other accounts, but you would have to verify that.

Anyways, that will save you a lot of trouble and your broker can probably help you with the legal necessities.

Answer 6

All the other answers posted thus far discuss matters from the perspective of US tax laws and are unanimous in declaring that what the OP wants to do is indeed a very bad idea. I fully agree: it is a bad idea from the perspective of US tax laws, and is likely a bad idea from the perspective of Indian tax laws too, but what the OP wants to do is (or used to be) common practice in India. In more recent times, India has created a Permanent Account Number ("PAN number") for each taxpayer for income tax purposes, and each bank account or investment must have the owner's (or first-named owner's, in case of a joint account) PAN number associated with it. This most likely has decreased the popularity of such arrangements, or has led to new twists being used.

The OP has not indicated the residence and citizenship of his family (or his own status for that matter), but if they are all Indian citizens resident in India and are Hindus, then there might be one mechanism for doing what the OP wants to do: apply for a PAN number in the name of the Hindu Undivided Family and use this number to carry out the investments in the name of the Hindu Undivided Family. (There presumably are similar statuses for undivided families for other religions, but I am not familiar with them). There are lots of matters here which are more legal questions than personal finance questions: e.g. if the OP is a US tax resident, then the family presumably will not be able to claim Hindu Undivided Family status since the OP has been divided from the family for tax purposes (or so I think). Even if HUF status is available, the OP might not be able to act as the pater familias while his father is alive, and so on. Consultation with tax lawyers, not just chartered accountants, in India is certainly advisable.

Answer 7

Assuming you and your family always get along and everyone is happy with the situation...

Should you become ill, die, or go on government benefits for some catastrophe, the government will look at all those funds as YOURS, and now your wonderful family is hurt by the estate tax and/or expectations of how much of the bill you handle before support kicks in.

Additionally, should you ever reach a point where you are married and then facing divorce (even if no fault of your own), all that investment is now up for grabs in equitable distribution. So your family's entire investment fund is at risk.

Answer 8

There are two issues. The first is that you can manage all of your family's money. The second issue arises if you now "own" all of your family's money.

As far as entities go, it is best to keep money or assets in as many different hands as possible. Right now, if someone sued you and won, they could take away not only your money, but your parents' and brother's money, under your name. Also, there are gift, estate and inheritance tax consequences to your parents and brother handing all their money to you.

You should have three or four separate "piles" of money, one for yourself, one for your brother and one for each of your parents, or at least both of them as a couple. If someone sued one parent, the other parent, your brother and you are protected.

You can have all these piles of money under your management. That is, your parents and brother should each maintain separate brokerage accounts from yours, and then give you the authorization to trade (but not withdraw from) their accounts. This could all be at the same brokerage house, to make the reporting and other logistics relatively easy.

Answer 9

You can perfectly well manage their wealth without transferring their money into your account first. Just make them open their own account on their name then ask them for credentials and then manage their money from within their own account.

That way everyone will be taxed according to their wealth (which is probably advantageous but you probably have to help them with the paperwork) and it is clear at every time what belongs to whom and your relatives can at every time access their wealth. These are big advantages (for them).

This keeps you at the role of an adviser (a very active one though) which should have almost zero legal ramifications for you unless you try to deceive your relatives.

You may want to shift wealth between accounts to minimize tax burdens, but that comes at the risk that should the family relations get worse this might result in anger.

You could open up a registered society, all members getting shares and voting rights, making you the CEO, but that should be a lot of paperwork and maybe only a good idea for large amounts of money.

If you decide to transfer money between accounts of different persons this is like a gift. It might invoke a gift tax in your area.

All in all, I strongly advise you to make them all open up their own accounts and then just operate the accounts and manage their wealth in their name. Sell it to them as the solution that retains them maximum ownership.

Answer 10

My answer is with respect to the United States. I have no idea about India's regulatory environment.

Don't take custody of the assets

You are opening yourself up to massive liabilities and problems if you deposit their money in your account.

I managed investment accounts as a private investment advisor for years (those with less than 15 clients were not required to register) until Dodd-Frank changed the rules. Thus you would have to register as an advisor, probably needing to take the series 65 exam (or qualifying some other way, e.g. getting your CFP/CFA/etc...).

I used a discount broker/dealer (Scottrade) as the custodian.

Here's how it works: Each client's account was their own account, and I had a master account that allowed me to bill their accounts and manage them.

They signed paperwork making me the advisor on their account.

I had very little accounting to handle (aside from tracking basis for taxed accounts).

If you take custody of the money, you'll have regulatory obligations.

There are always lots of stories in the financial advisor trade publications about advisors who go to jail for screwing their clients. The most common factor: they took custody of the assets.

Do you want a single account?

I understand why you want a single account - you want to ensure that each client gets the same results, right?

Does each client want the same results?

Certainly the tax situation for each is different, yes?

Perhaps one has gains and wants to take losses in one year, and the other doesn't. If their accounts are managed separately, one can take losses while the other realizes gains to offset other losses. Financial advisors offer these kinds of accounts as Separately Managed Accounts (SMAs). The advisors on these kinds of accounts are mutual funds managers, and they try to match a target portfolio, but they can do things like realize gains or losses for clients if their tax situation would prefer it.

You certainly can't let them put retirement accounts into your single account unless the IRS has you on their list of acceptable custodians.

Recommendation

I suggest that you familiarize yourself thoroughly with the regulatory environment that you want to operate under. Then, after examining the pros and cons, you should decide which route you want to take.

I think the most direct and feasible route is to pass the Series 65, register as an investment advisor, and find a custodian who will let you manage the assets as the advisor on the account.

Real estate is another matter, you should talk to an attorney, not some random guy on the internet (even if he has an MBA and a BS in Real Estate, which I do). This is very much a state law thing.

Answer 11

I transfer all their funds to my bank account

Are they paying tax on that transfer? Gifts under $14,000 are excluded from taxation in the US, but they're going going to have a hard time arguing that it is a gift (since they expect it back). The taxes are almost certainly going to exceed the amount you can make from your investments in the short term, and if they aren't paid then your "clients" are going to be in hot water with the IRS.

You need to have something set up that establishes you as merely managing the funds, and not receiving them personally as a transfer. The other answers have good suggestions.

Answer 12

Aside from the fact that there are massive problems with taxes, liability, fiduciary responsibility, and (assuming you're accepting any sort of compensation at all) licensing. The mere fact that you're asking this question indicates that you're probably not suitably qualified to handle this for others.

Why not have someone qualified handle this?