Ask Liz Weston

Get smart with your money

Kids & Money

Q&A: Setting up nieces and nephews for success

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Dear Liz: This is a little unorthodox, but I’m hoping you can help. I have six nieces and nephews from my various brothers and sisters. They range in age from babies to teenagers. When they get older, I want to be able to assist them with therapy sessions — not because I think their parents will mess them up, but because I believe mental health is important to success. I imagine telling them about this fund when they are about 18 or so, so I’d need money I can access in five to 10 years. How should I start saving for this? What accounts should I use? Should I open one account for each of them, and how can I manage this the best way for my taxes?

Answer: Custodial accounts could save money on taxes, but the money would become entirely theirs at a certain point (typically age 18 or 21) and you would lose control over what they did with it. You could hire an attorney to draft trusts that would have more restrictions, but that will cost hundreds or even thousands of dollars to set up and administer.

The simplest solution would be to set up one or more accounts in your own name that you’ve earmarked for this purpose. You would pay taxes on any interest, dividends and capital gains accrued, but you would maintain control of the money and it wouldn’t affect the children’s ability to get financial aid in college.

Keeping control also gives you the flexibility to use the money for another purpose, in case your young relatives don’t need or want therapy. Mental health challenges — although widespread — aren’t universal. A survey funded by the National Institute of Mental Health found 46% of adults had a psychiatric disorder at some time in the past, and one-quarter had experienced a problem in the previous year. The most common disorders were major depression (17%), alcohol abuse (13%) and social anxiety disorder (12%).

If you’re concerned about their success and want to help with money they’re even more likely to need, consider funding 529 college savings plans. The money can grow tax-deferred and be used tax-free at virtually any post-secondary school in the U.S., as well as some abroad. You can maintain control and have the flexibility to move money to other beneficiaries, or to withdraw it at any time (although you’d pay penalties and taxes on any earnings).

Q&A: This son’s failure to launch is hurting his parent’s finances

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Dear Liz: I have a 24-year-old son who has been trying to get through college for nearly seven years. I have helped him with direct gifts and by co-signing loans, but I am pretty tapped out. He tells me he has one year left but has no way to pay for it. He is disorganized and not particularly motivated, although he does talk about things he’s learning and I think is at least somewhat committed to school (he maintains about a B to C average at the state school he attends). He has moved back home to save money and is working full time but had gone many months without a job in the last year. He accumulated credit card debt and generally is a financial disaster.

Do I take out a second mortgage or co-sign another loan, which would be a stretch for me, or do I watch him drop out of school, which seems a really harsh life lesson? I know he might be able to take a year off and then go back, but let’s be honest — if he takes a break, it becomes less likely that he’ll ever return.

Answer: You sound like you’re more than tapped out. You already may be overextended because those private education loans you co-signed are just as much your responsibility as his — and he doesn’t sound like a terrific credit risk, at least at this point. Doubling down by borrowing more money doesn’t seem like the wisest choice for either of you.

Taking a break from school could increase the chances he won’t get his degree, but it also could give him time to get his financial life in better shape and perhaps tackle some of the issues impeding his progress. His disorganization and slow pace through school could point to an underlying problem such as a learning disability or attention-deficit/hyperactivity disorder (ADHD). His college may have a counseling center that could connect him with resources to help, or you could ask your family physician for a referral.

Q&A: Saving and investing for a child

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Dear Liz: I recently got a court judgment for my daughter’s father to pay me child support. She is 1 year old, and it will be about $1,500 a month. I would like this money to be a gift for her when she is older. I’m told not to put it in her name now, as it may hurt her chance for financial aid for college later. How do you recommend I save and invest it for her? I’d like her to have it when she is a young adult.

Answer: This could be quite a gift for a young woman. If the money earned a 5% average annual return over time, you could be presenting her with a check for half a million dollars.

Consider putting at least some of the money in a 529 college savings plan. Withdrawals from these plans are tax-free when used to pay qualified college expenses. College savings plans receive favorable treatment in financial aid formulas because they’re considered an asset of the contributor (typically the parent), rather than the child.

Q&A: Best savings vehicle for a baby

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Dear Liz: I recently gave birth to a little boy. I am wondering about the best savings vehicle that would offer flexibility for when family gives him money. I don’t want to tie it up in a 529 college savings plan in case he doesn’t want to go to college or has other needs.

Answer: If you want your child to have a reasonable shot at a middle-class lifestyle in the future, some kind of post-secondary education will be necessary. It may not be a four-year degree; it could be a one- or two-year training program, and a 529 college savings plan can help pay for that. Money contributed to a 529 plan grows tax-deferred and can be used tax-free at nearly all colleges, universities and community colleges as well as many career and technical schools.

You will remain in control of the account and can withdraw money for other purposes if necessary, although you would owe income taxes and a 10% federal penalty on any gains.

If you really can’t accept any limitations on how the money is used, then you can open a brokerage account in your own name and invest the money there. Putting the money in his name could hurt his chances for financial aid if he does decide to go to college.

Q&A: More on teens and cars

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Dear Liz: Your answer to the parent wanting to purchase a convertible for his son reminded me of something that happened long ago. When I graduated from high school in 1966, a friend’s wealthy parents bought him a brand-new Lamborghini Miura as a graduation present. Two days after he got the car, he missed a curve in the mountains and rolled the vehicle. By a miracle he was not badly hurt, but the car was scrap. You gave good advice. Giving your teenage son the keys to a high-performance car is like handing him a live grenade. Kids often want things that they should not have.

Answer: These stories are legion at affluent schools where parents are so focused on indulging their children, or flaunting their wealth, that they don’t fully consider the risks involved. Sometimes the children aren’t as lucky as your friend was.

Parents can still make an ostentatious display by buying their children new four-cylinder luxury sedans, replete with air bags and other safety features, and replacing them when they’re inevitably totaled. But everyone involved would be better off if parents avoided high-horsepower vehicles, new or used, that tempt their kids to test their driving limits.

Q&A: Living like a student after graduation

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Dear Liz: Regarding your recent column advising recent college grads to keep living like students: I helped my three children do just that. I had them live at home rent-free for six months after graduation and told them to save money like crazy.

Then when they rented an apartment, they would have the rental deposit saved as well as money for utilities, food and so on. I taught them to cook simple nutritional meals. We had already given each kid a car senior year and covered the insurance. I took home equity lines of credit to pay college tuitions, room and board, so they had no debts and six months to transition to serious responsibilities.

Answer: You’ve given your children a good head start in life at a time when so many others are starting out deeply in debt. Hopefully you didn’t do so at the expense of your own finances.
Home equity lines of credit may seem like cheap money, but the rates are variable and could spike if interest rates rise. If the debt is relatively small and can be paid off in a few years, that’s one thing.

If the debt is large and you can’t pay it off quickly, though, you may have put your home (and your retirement) at risk.