Kids & Money Category
Dear Liz: In 1985 my father set up a Uniform Gift to Minors Act brokerage account for my son. By 1997, my father had withdrawn all the money and put it back into his personal account. My son should have gained control of the money last year, but there was nothing left. Didn’t the investment firm have a responsibility to prevent my son’s grandfather from doing this?
Answer: In a word: no.
Your father is the one who is ultimately responsible for his actions. As custodian, he had the legal right to withdraw money and use it for your son’s benefit. It’s not up to the brokerage firm to police what happened to the funds after they left the custodial account.
What your father did was, of course, wrong – legally and in every other sense. Once the money went into the account, it belonged to your son.
Your options at this point, however, are pretty limited. You can point out the funds weren’t his to take, and ask him to return the money. If he refuses, your son could sue him, but lawsuits among family members tend to make future holiday gatherings rather tense. Unfortunately, this kind of situation isn’t uncommon, and many families decide the fight to regain the promised money isn’t worth the upset.
Dear Liz: I’d like to buy my children shares of stock to get them interested in investing. How do I go about this?
Answer: It’s not as easy as you might think.
Children under 18 generally are not allowed to own investments in their own names. As a result, you must decide first how to hold the shares: in a custodial account, in a joint account with them or in your own account.
Keeping them in your own name may be the best option if you’re concerned about future college financial aid, because the other two choices could count heavily against them in the federal aid formulas.
You also have many alternatives when it comes to buying the shares Â always with a variety of fees, charges and options to watch.
You can buy your shares through a brokerage, but you may face commissions, minimum account balance requirements and account fees.
If this is a one-shot investment or you’re able to commit only small amounts of money at a time, a better option might be ShareBuilder Corp., a low-cost online broker, which has no minimum balance requirements or account fees.
ShareBuilder charges $15.95 for single trades or as little as $1 per trade in its automatic investing program.
You also might consider buying directly from the company that issues the shares.
Hundreds of companies Â including many your kids would know, such as Coca-Cola Co., Mattel Inc., McDonald’s Corp. and Sony Corp. Â sell shares directly to investors. Again, minimum purchase requirements, account fees and commissions may apply.
DirectInvesting.com, a website that provides direct investment enrollment services for hundreds of companies, can get you started.
All these options are electronic, so you won’t get a stock certificate you can wrap for holiday gift giving. If that’s what you’re after, you might check out the options at OneShare.com, a site that specializes in selling single shares of stock as gifts.
OneShare.com sells shares from about 130 companies; you pay the cost of the stock, plus transfer fees and framing that add about $90 to the cost of each share.
It’s not exactly a frugal option, but your kids will get real stock certificates to hang on the wall. They’ll also get annual reports, proxy statements and all the other paperwork that comes with being an investor.
Dear Liz: I’m a financial planner who liked your answer to the dad who wanted to fund his children’s IRAs but was shocked to see your recommendation (though with caveats) to purchase annuities.
I can’t imagine annuities would be suitable for children under any circumstances. Only under the best possible scenario of assumptions would an investment in an annuity (even a low-cost annuity) beat a reasonably tax-efficient mutual fund over any time period.
As long as money withdrawn from an annuity remains taxable as ordinary income, and as long as ordinary income tax rates are measurably higher than capital gains rates, this will be the case. I fear that brokers will be handing out your article as a tool to sell annuities for kids. To get an endorsement from someone of your reputation has probably helped some of them make this week’s sales goals. Let’s hope not!
Answer: Let’s hope not, indeed. Annuities tend to have high costs and do just one thing efficiently: turn capital gains that would otherwise qualify for low tax rates into ordinary income, which is taxed at a much higher rate.
Most investors would, as you point out, be much better off investing in index funds or other tax-efficient mutual funds.
However, annuities have one advantage that might appeal to this dad: They’re typically not counted in financial aid formulas, according to FinAid.org founder Mark Kantrowitz, because they’re considered retirement accounts. If the children don’t have enough earned income to fund IRAs, annuities would allow him to start saving for their retirements without having to worry about reducing their future aid packages.
This advantage may not outweigh all the disadvantages of annuities. But it’s something the dad should know about as he’s mulling over his options.
Q: We have bailed out our adult son and his wife so many times that we are dead broke. Our savings are gone and so is most of our monthly income. I bring home $1,000 a month and my husband is a disabled vet with an income of $2,000 a month. My son has a good job and his wife works, but they think it’s more important to have fun than pay bills. Unfortunately, there is never enough money after the fun to pay the bills. It’s always, “The lights are going to be shut off” or “The car is going to be repossessed” or “There’s no food in the house.” They have two kids and another on the way. Do we let them go without electricity and food for our grandkids or do we just keep shelling out?
A: Here’s what you probably already know: if your son has a good job and his wife works, your grandchildren are not going to starve. Yes, the lights might get shut off and yes, the car might be repossessed and yes, those consequences might be the best things that ever happened to this pair of overgrown teenagers.
Your son and his wife know they can push your buttons with these tales of dire “emergencies” created solely by their own irresponsibility. It’s long past time for you and your husband to disconnect the wiring that has caused you to impoverish yourselves for their benefit. Saying, “No, I’m sorry, we can’t help you” may not cure their free-spending ways, but it will keep your financial ship from being sunk in their wake.
Dear Liz: I didn’t think your advice was very good to the parent who asked about retirement planning for a 25-year-old son who was living at home. You got on your high horse about how the parent should charge him rent because he has to learn responsibility sometime. I took the opposite approach with my kids and told them they were welcome to stay with me as long as they liked, provided they were saving money for a down payment on a house. I also advised them to put 20% of their incomes into retirement accounts because it’s important to start saving when you’re young and not saddled with expenses. Once they saved up their down payments, they moved out and bought their own houses. It really didn’t cost me anything to have them live with me and I got to spend more time with them, which is important too. Too many other old folks complain that their grown kids never visit, but I wonder whether they ever did any favors for their kids when they were younger.
A: A parent’s freehandedness about money doesn’t necessarily ensure gratitude, but your approach is certainly reasonable. You set clear financial terms for your adult children, and they rose to the occasion. Yet another approach might be charging rent,Â thenÂ returning the payments as a gift toward the child’s down payment on a first home.
What you don’t want to have is an adult child who’s not paying rent, not saving for the future and spending his money on whatever he pleases. That kind of prolonged adolescence does no one good.
Dear Liz: I want to disagree with you over your recent advice about buying cars for kids.
I was extremely depressed during my senior year of high school for many reasons, but a big part of it was that I couldn’t drive because of our financial situation. My mom had other bills to pay, and my paychecks weren’t big enough to cover the insurance.
I really don’t think you grown-ups know how it feels to wait for rides, walk home past the young sophomores that drive and have people look down on you. All I can say is that when I have kids, I will do anything to make sure they have a car.
A: No, you probably won’t â€” because someday you’ll be the grown-up and you’ll realize what a service your mother did for you by not buying you something your family couldn’t afford.
You also will learn, with anyÂ luck, thatÂ how you react to circumstances is a lot more important than the circumstances themselves.
By the way, many of us grown-ups know exactly how it feels to wait for rides, and we survived just fine.
Question: I’m in my 20s and make a good salary, but I still live in my parents’ house â€” actually, in their basement.In my culture it’s considered the child’s duty to help support the parents, but I’m the only one of several children with a good job. So I help my parents pay their mortgage, and I also give my mother spending money each month.
I’m pretty sure that my mother gives the money to one of my older brothers, who wants to be a comedian and who refuses to get a job to support himself. I think she’s tried not to give him money, but he has a terrible temper and she’s afraid of making him angry.
I want to do the right thing, but I’m getting tired of supporting everyone and not getting on with my own life. Do you see a way out?
Answer: Of course, and so do you. You just haven’t been willing to take the first step.
It’s important to honor your culture, but it’s unlikely your culture includes an ancient tradition of supporting tantrum-throwing wannabe comedians. If your mom is passing along your largess, then you’re giving too much and indirectly aiding your brother’s refusal to grow up.
Figure out how much money you need to get your own place, build up a decent emergency fund and begin saving for retirement. Your parents may have convinced you that supporting them in their old age is your duty, but you shouldn’t count on being able to convince your own kids of the same thing. Your parents’ stipend can come out of what’s left.
If that’s not enough to pay for the lifestyle to which they’ve become accustomed, they may need to take the opportunity to downsize â€” perhaps into a house that’s too small to house Brother Freeload. If your mother has reason to fear your brother’s reaction, a call to the local domestic violence hotline can offer resources for dealing with the situation.
All this assumes your parents aren’t elderly, disabled or otherwise dependent on you to stay above the poverty line. If cutting back would throw them into an economic tailspin, you may need to remain at home awhile longer as you transition them to a more realistic standard of living.
You may well face a barrage of parental and familial criticism for daring to put limits on your dole. But if you’re convinced that you have a right to a life of your own â€” one that allows you to help your parents without being drained by their demands â€” then you’ll be able to survive. Interestingly enough, so will they. Good luck.