how best to do recurring birthday investment for my god-daughter?

November 14, 2005 1:42 PM

How best to invest $100 every year for my god-daughter...S&P, favorite stock, CD?

I'm Irish living (temporarily) in the US, my god-daughter is French/Irish living in Paris. On her first birthday two years ago I started the tradition of giving her $100. Never got around to deciding the best investment...so for the moment she is receiving cash.

I am looking for a long-term accumulation of this fund that reduces the tax liability. I would also like not to have to declare this tax and suspect this can be done by reinvesting any dividend in the case of a stock or bond so that the tax is paid when she receives the money or sells the stock.

Perhaps this can be best done by investment schemes run by the French government?

Thanks a lot for any advice.

posted by johoney to Work & Money (17 answers total)

Well, in the US you can give gifts of up to $9,999 without any tax liability on the receiver. Since you probably aren't going to keep this up for 100 years, there's no tax risk. At least, not in the US. I don't know about France, though, but I wouldn't worry about it.
posted by delmoi at 1:57 PM on November 14, 2005

I don't have any particular advice to give about appropriate investments for French citizens, so I'm not going to get into it. But, as a general rule, watch out for fees on whatever investment vehicle you choose to purchase. If you try to buy shares of an individual company $100 at a time, you'll pay WAY to much in brokerage fees even at the cheap online brokers. It's hard to make an efficient investment with $100, so you may want to try to investment some of the money she's saved from previous gifts or fast-forward some of your future gifts in order to get over the initial investment amount for some of the less expensive mutual funds (as a general rule, I'd recommend an index fund over an actively managed fund).
posted by mullacc at 2:13 PM on November 14, 2005

At $100 a year for 18 years (childhood), we're only talking about $1800. And if you're only putting in $100 each year, the actual return on such a tiny investment, IMHO, isn't worth investing in.

I think if you're serious about creating a fund that will have some significant accumulation, either buy an $1800 CD now and reinvest after it matures (1-3 years, or whatever) or buy into an index fund or bond. While I like your gesture, it's investment significance is negligible wen broken up into $100 increments over 18 years.

Hell, it might even be smart to just let her blow the $100 as she wishes (it'll teach her the value of saving money).
posted by SeizeTheDay at 2:24 PM on November 14, 2005

Hell, it might even be smart to just let her blow the $100 as she wishes (it'll teach her the value of saving money).

Yeah, seriously. Two is a little young, but I would have apreciated $100 a lot more as a child then I would today, even with a good return on investment.

Btw, you can do a spreadsheet to figure this stuff out:

set A1 = 1, B1 = 100. C1 = (whatever APR you want, as a number, rather then a percentage, so 50% = 0.5)
then set A2 = A1+1, B2 = B1*(1+C$1)+100

Then copy and paste row two into as many rows as you'd like, to see how much your principle would be worth with whatever APR you type in. The A colum will be the year number, and the B colum will hold the accumulated amount.

Here are the results for 10% apr:

1 100
2 205
3 315.25
4 431.0125
5 552.563125
6 680.1912813
7 814.2008453
8 954.9108876
9 1102.656432
10 1257.789254
11 1420.678716
12 1591.712652
13 1771.298285
14 1959.863199
15 2157.856359
16 2365.749177
17 2584.036636
18 2813.238467

If you can get a 90% APR, you'll be able to give her 11 million dollars.
posted by delmoi at 2:39 PM on November 14, 2005

Well, in the US you can give gifts of up to $9,999 without any tax liability on the receiver. Since you probably aren't going to keep this up for 100 years, there's no tax risk. At least, not in the US. I don't know about France, though, but I wouldn't worry about it.

Actually,(a) the amount you are thinking of is $11,000 - has been since 02. And the question of immediate availablity has to be addressed. This question (though not really pertinent for the US) presumably is about a gift that will not be immediately available. and (b) the tax liability associated with the gift tax is always on the giver, not the receiver.
posted by phearlez at 2:45 PM on November 14, 2005

Compare the above ($100 a year for 18 years at 10% interest) with this ($1800 once, no further principle, at 10% interest for 18 years):

$1,800.00
$1,980.00
$2,178.00
$2,395.80
$2,635.38
$2,898.92
$3,188.81
$3,507.69
$3,858.46
$4,244.31
$4,668.74
$5,135.61
$5,649.17
$6,214.09
$6,835.50
$7,519.05
$8,270.95
$9,098.05

The wonders of compound interest.
posted by griffey at 2:50 PM on November 14, 2005

I'm going to suggest you invest it in her growth and development somehow, instead of just giving her money. Something that will educate her as she grows, and later on things that will allow her to explore things she has expressed interest in, to help her become a more well rounded individual.
posted by mhuckaba at 3:13 PM on November 14, 2005

Not that it matters in this situation ,but the $11,000 is also annual, not lifetime (per the publication that phearlez linked to).
posted by blackkar at 3:26 PM on November 14, 2005

Compare the above ($100 a year for 18 years at 10% interest) with this ($1800 once, no further principle, at 10% interest for 18 years):

er, crap. Actualy I changed the table above to reflect a 5% intrest rate, which is more achevable, but I forgot ot change the text of my comment. With a 10% APR and $100 payments each year, you get $4.5k. Still less then half of $1800 invested once, but more then a quarter :P
posted by delmoi at 3:33 PM on November 14, 2005

Response by poster: Thanks everyone for the great advice.
posted by johoney at 3:57 PM on November 14, 2005

I am a huge fan of the 529 education savings plans. They are like 401k plans but for college savings - there's one run by each of the 50 US states and you don't have to live in the state to participate in their plan. It's easy to start with a small amount of money. Of course this may or may not be applicable to your situation - I'm not sure if there are regulations that require the beneficiary to attend college in the US.
posted by selfmedicating at 4:22 PM on November 14, 2005

I'll join in on the index fund advice.
posted by Sharcho at 4:54 PM on November 14, 2005

I think this is a really good idea, and despite the naysayers I think investing in stock or funds is a good idea. If nothing else, 15 years from now your god-daughter will be a stock or fund holder. Initial investment requirements will like prove a greater obstacle than fees.

You might pay forward a couple years and start off with the Women's Equity Fund ($500 initial investment required). If there are companies or ideas you like in a given year (Google?), buy $100 worth of shares. I'd spread it out and try to fill her portfolio with investments aimed at making a slight difference. I've invested (long-term) in geographically based funds for retirement, and would absolutely consider it for this too (an example).

That said, if her parents are not well-off, they probably could and would make the best use of cash to invest in her development. A nice new outfit every year may do more for her life today and tomorrow than growing up to be a trust fund baby.
posted by McGuillicuddy at 5:17 PM on November 14, 2005

I am a huge fan of the 529 education savings plans.

Dear Shannon,

I understand what you’re saying about the mere mortal thing. It’s like you need an advanced degree of some kind to understand half of that stuff. To start with, I don’t recommend 529 plans. The only reason you’d want to use a 529 plan is if you’d maxed out your Educational Savings Account (ESA), or if you make more than $200,000 a year. If you’re making that kind of money, then you don’t qualify for an ESA and you’d have to look at a 529.

Many of the 529 plans are very inflexible, and no, the money’s not exempt from taxes – only the growth is exempt and it’s only exempt if you use it for college. I don’t understand why so many financial planners are getting excited and turning back flips over the 529. Ninety-eight percent of Americans qualify for the ESA, which is totally flexible. With the ESA you get to choose the investment, you don’t lose control and it grows tax-free just like the 529.

You should always do an ESA before you even consider a 529. There are lots of down sides to the 529, particularly the fact that you completely lose control of the investment.

- Dave

link
posted by justgary at 7:11 PM on November 14, 2005

I'm not sure I'd trust the french governement with my money. Their economy has some huge structural problems. Unemployment overall is 10%, among young people, its 20% and among young immigrants (of whom there are many) it's 40%. This is not indicative of a wise allocation of resources.
posted by Good Brain at 10:02 PM on November 14, 2005

Why not buy her a good old-fashioned U.S. Savings Bond?
posted by mkultra at 6:50 AM on November 15, 2005

If your god-daughter is under the French tax regime, there's simply no way you can do this without talking to a French lawyer and/or tax accountant. There's no other way to do itunless you want to give cash and let her parents deal with investing it.

French gift taxes are more than 40%. There are exemptions. There are also various types of tax-deferred investment accounts, which your god-daughter's parents should be able to find out about from their bank.

You may find a lot of other provisions of the French tax code very strange from an American perspective. France has no concept of a trust fund whatsoever, and doesn't have any consistent way of treating American-based trust funds. If you make a gift to someone, that gift can be automatically revoked if you have a child yourself, in order to protect your inheritors. Although that theoretically shouldn't apply if your children aren't French, it's one of many examples of why you need to talk to an expert in French tax law.
posted by fuzz at 8:46 AM on November 15, 2005