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Financial Gift for Newborns?

post #1 of 14
6/14/09 at 10:35am
Thread Starter 
As of March, I became a first time uncle and I will soon be a godfather. I'd like to lay the foundation for my nephew to have at least a little financial security as he grows up...neither of the parents have had long term employment over the last 5-10 years. I was trying to figure out the best way to set something up that would provide a safe, steady return. What would my best options be? U.S. savings bonds? A regular savings account? I thought about a college savings plan, but I think he already has one set up. Suggestions?
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post #2 of 14
6/14/09 at 12:07pm

Re: Financial Gift for Newborns?

Short answer: US Bonds are risk free. You can buy inflation protected bonds that provide some nominal return guaranteed above inflation. Conventional reasoning should apply: the lower the risk, the lower the return.

Beyond that, your options could vary greatly depending on the amount, the investment timeframe, how your nephew will access the money (lump sum or annuity), and how much you trust the parents to manage the gift.
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post #3 of 14
6/15/09 at 2:17am

Re: Financial Gift for Newborns?

In the past many people gave shares of blue-chip stock to toddlers, figuring they need the inflation hedge. But what the heck is blue-chip anymore?

One family I know gave the kids one share of Berkshire Hathaway class A stock (symbol BRK-A). But who knows how that will hold up in the future.
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post #4 of 14
6/15/09 at 6:00am

Re: Financial Gift for Newborns?

Bonds
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post #5 of 14
6/15/09 at 11:40am

Re: Financial Gift for Newborns?

Just because he has one set up, doesn't mean you can't, or shouldn't, set up another one. 529 plans are a good idea, especially if started an early age.
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post #6 of 14
6/16/09 at 9:00pm
Thread Starter 

Re: Financial Gift for Newborns?

I guess I could do bonds, but wouldn't I be better off gifting certificates of deposit? They're insured and the interest rate is higher.
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post #7 of 14
6/18/09 at 4:49am

Re: Financial Gift for Newborns?

CDs have to be renewed every so often and the tax is not deferred
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post #8 of 14
6/18/09 at 6:00am

Re: Financial Gift for Newborns?

And interest on savings bonds can be tax-free when used for higher education expenses.
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post #9 of 14
6/18/09 at 7:46am

Re: Financial Gift for Newborns?

Quote:
Originally Posted by Michael_K_Sr
I guess I could do bonds, but wouldn't I be better off gifting certificates of deposit? They're insured and the interest rate is higher.
Depends on the sums, who manages the account, the duration of the investment. There's no way to assess "better" without the details.

Are there taxes on income for a minor? Is it low enough that a higher rate on a taxed CD is more efficient than a tax-free bond? Are you giving thousands and thousands of dollars so the parents might be tempted to manage the money contrary to your intentions?

If this is a gift of just a couple hundred dollars, I suggest giving the money to the parents as gift cards to Babies R Us (or whatever); they need the money now for diapers much more than the kid needs it in 18 years. You can save money for the next 18 years on your own terms and give him a more substantial gift for high school or college graduation.

If it's a realistic concern you might not live to see his graduation, write him into your will.

If this is a gift of some tens of thousands of dollars, you might better talk with both the parents and your accountant for a tax-efficient giving & investment method, and a way that won't inadvertently come across badly to the parents.
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post #10 of 14
6/18/09 at 3:03pm

Re: Financial Gift for Newborns?

Quote:
If this is a gift of just a couple hundred dollars, I suggest giving the money to the parents as gift cards to Babies R Us (or whatever); they need the money now for diapers much more than the kid needs it in 18 years.

I agree with the suggestion if the gift is large, but I disagree with this one. Unless the parents are in bad straits giving the government bond will isolate it for the child's use, and it'll be for something special when he's old enough. As an added bonus, it'll have the purchaser on the Bond, so he'll know it came from you. Also, if many of these are given, they add up quickly. We received about $1000 in bond gifts and it'll be nice to use for college books, or a car when the kids are ready.
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post #11 of 14
6/18/09 at 5:31pm

Re: Financial Gift for Newborns?

Reading between the lines.....

You may wish to establish a trust with your nephew as the beneficiary. You can do darned near anything with a trust. A trust has a grantor (you), a res (the money/other stuff), a beneficiary (the nephew), and a trustee. The trustee is going to be the problem for you. A trust may fail if it lacks any of these things. How good are you at doing your own legal work with the help of some books from the library?
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post #12 of 14
6/18/09 at 8:03pm

Re: Financial Gift for Newborns?

Quote:
Originally Posted by Al.Anderson
Unless the parents are in bad straits giving the government bond will isolate it for the child's use, and it'll be for something special when he's old enough. As an added bonus, it'll have the purchaser on the Bond, so he'll know it came from you. Also, if many of these are given, they add up quickly. We received about $1000 in bond gifts and it'll be nice to use for college books, or a car when the kids are ready.

It will not isolate it for the child's use. A parent residing with a minor to whom a savings bond is issued can redeem the bond on behalf of the minor at any point once the bond is redeemable. In addition, paper bonds can be deposited into a Treasury Direct electronic account, so the minor might never even see who purchased it.

The bonds are nice, but $100 will go further towards diapers now than whatever it is used for as $200 about 18 years from now.

We're about to have our second child, and we've been diaper speculating. In the last 2.5 years, the cost for a package of diapers has gone up about 20%. Counts in the packages were reduced once during that time period and the count reductions will be occurring again during the next few months. These changes have taken place across the board regardless of brand.

Right now $100 will get you about 2.25 months worth of diapers (or if you shop like my wife you can get about 3 months worth, but that requires advanced shopping calculus).
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post #13 of 14
6/19/09 at 12:36pm
Thread Starter 

Re: Financial Gift for Newborns?

I guess I'll decide whether to go with bonds or a 529 by the end of the weekend. Bonds are only paying a paltry 0.7% interest right now, which doesn't sound bad given the bath I took on my 401K last year. But I expect the market to rebound during the next 18-20 years before my nephew reaches adulthood. The pros I see for a 529 are that my contributions are tax free, the withdrawals are tax free when used for college expenses and there is a potential for a much greater rate of return. The cons on the 529 are that they could potentially lose money, there are program fees involved that eat into the earnings, and you are hit with a 10% penalty plus taxes if the beneficiary doesn't attend college. Lots to chew on...
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post #14 of 14
6/19/09 at 7:23pm

Re: Financial Gift for Newborns?

You can change a beneficiery on a 529. If the kid doesn't go to college, you can always give the money to someone else who does.

I know, not exactly in the spirit of gift giving, but it is an option.
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