Inheritance Investing Options

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mrsoul12
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Joined: Wed May 18, 2022 6:44 am

Inheritance Investing Options

Post by mrsoul12 »

I recently inherited a moderate amount of money (around $30,000) that I want to set aside for my two children ages 15 and 17. My wife and I have already funded 529 in amount we feel will likely cover all education related expenses. We see this money eventually going toward a down payment on a first home or some other worthwhile expenditure in the future. The timeframe will be a bit variable but a pretty safe bet would be at least 5 years for the oldest and 7 for the youngest. I am weighing the following options.

1 - Open a UGMA custodial account in each of their names. I see the main positive of this being that any gains will be taxed under their lower tax rate. the negatives I can see are - In my state the minor takes control of the assets at 21. This is a little earlier than we see as ideal. This money would negatively effect FASFA calculations (but as stated we can fund college without assistance if necessary). I think if we go this route we would need to be pretty conservative in our investment choices as the timeframe for them potentially cashing out would be as little as 4 years in the case of the oldest, so potential returns would be minimal.

2 - Put the money in something very conservative such as I-bonds, CD, high yield savings account in our name. Gift the assets to them at the appropriate time. The amounts should fall below the annual gift tax limits. Positives would be we control when they get the money, low tax implications, easy. Negatives would be lower potential returns.

3 - Put the money in a brokerage account in our name. This has the most potential upside in terms of returns, but if we went this route I think we would want to do the following.
- Keep track of what the money would have done if we put it in a high yield savings account and plan on gifting them that amount of money even if the brokerage account was down when they needed the money.
- Assuming the account had grown when they needed the money we could then either take a withdrawal and pay the taxes, or gift them the cash equivalent from a non-brokerage account and leave the brokerage balance where it is to continue to grow.

Thoughts?
WalnutBadger
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Re: Inheritance Investing Options

Post by WalnutBadger »

I was in a similar situation a few months ago with some differences. My son is only 1 and we are unsure if we will have a second. I am currently funding his 529 monthly so I'm not sure if there will be enough to pay for college. I was drawn to the third option for sake of flexibility. The time horizon for my son is much longer than yours as I don't foresee us gifting him any funds until he is in his mid 20's.

Personally, if I were you, I'd go the taxable brokerage route and maybe stick the funds into a more conservative AA to give the funds a greater chance of beating the HYSA benchmark. I'm sure others will have different advice and opinions.
mega317
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Re: Inheritance Investing Options

Post by mega317 »

I don’t see a reason to think about this money as a separate pot. Incorporate this into your portfolio, and when the time comes to give them a gift give them what you feel is reasonable. To tie the size of the gift to the performance of the stock market seems arbitrary.
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Lee_WSP
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Re: Inheritance Investing Options

Post by Lee_WSP »

Unless you will be continuing to utilize the annual exemption to gift to the children, there is no reason to create a UTMA for that little money. Just invest it normally in a separate account and give it to them when the time is right.

If you will be using up your annual exemption, then ask your trusts attorney to create a section 2503(c) trust.

As for the other two options, it depends on your risk tolerance. Since they have potentially many decades before they'll actually need the money, the stock market is as good an option as any. Otherwise you can put it in a target date fund with the target date of when they'll get it. Beware, it may spit out dividends.
mega317
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Re: Inheritance Investing Options

Post by mega317 »

Lee_WSP wrote: Wed May 18, 2022 12:05 pm As for the other two options, it depends on your risk tolerance. Since they have potentially many decades before they'll actually need the money, the stock market is as good an option as any.
Maybe, or maybe not. They may use it for a wedding, down payment, education.
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Lee_WSP
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Re: Inheritance Investing Options

Post by Lee_WSP »

mega317 wrote: Wed May 18, 2022 12:18 pm
Lee_WSP wrote: Wed May 18, 2022 12:05 pm As for the other two options, it depends on your risk tolerance. Since they have potentially many decades before they'll actually need the money, the stock market is as good an option as any.
Maybe, or maybe not. They may use it for a wedding, down payment, education.
That is the definition of "potentially".
mega317
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Re: Inheritance Investing Options

Post by mega317 »

Ok so if they potentially have many decades, they also potentially don't have many decades, which makes the stock market NOT as good an option as any.
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Lee_WSP
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Re: Inheritance Investing Options

Post by Lee_WSP »

mega317 wrote: Wed May 18, 2022 12:33 pm Ok so if they potentially have many decades, they also potentially don't have many decades, which makes the stock market NOT as good an option as any.
Same for us. What's your point?
backpacker61
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Re: Inheritance Investing Options

Post by backpacker61 »

I would purchase some shares of VTI in their name (or on their behalf under your name). Call your brokerage and ask about the best way to set this up.

FWIW, my parents gifted me some shares of a CEF when I was 17 or 18 (in the form of paper stock certificates).

I still own the shares and am over 60 now (though they're now just book entry shares in my brokerage account as I mailed in the paper certificates).
“Now shall I walk or shall I ride? | 'Ride,' Pleasure said; | 'Walk,' Joy replied.” | | ― W.H. Davies
brian91480
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Re: Inheritance Investing Options

Post by brian91480 »

If you're willing to cover potential short term losses... invest in the market. This is a great opportunity for you to teach your kids about investing. They'll be much more interested and pay attention because it's their money.

Bonus... Bear markets are a good time to throw in a pot of money! 👍

-- Brian
Topic Author
mrsoul12
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Re: Inheritance Investing Options

Post by mrsoul12 »

If I went option 3 -

Looking at aa one time investment of $30,000 and a 10% average annual return with a 15% deviation after 6 years that would be (based on past performance) worst case $22,000, average case $53,000, best case $114,000. Those assume a -5%, 10%, and 25% return for each consecutive year. Obviously none of those will actually happen, but it makes me like option 3.
DIYtrixie
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Re: Inheritance Investing Options

Post by DIYtrixie »

mega317 wrote: Wed May 18, 2022 10:44 am I don’t see a reason to think about this money as a separate pot. Incorporate this into your portfolio, and when the time comes to give them a gift give them what you feel is reasonable. To tie the size of the gift to the performance of the stock market seems arbitrary.
+1
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