Where should I set up a simple majority fund for a minor?

December 31, 2016 10:56 AM

If I want to set up a majority fund in the name of a minor, age 10, without the restrictions of a 529, in some way that would be mostly hands-off but periodically rebalanced without much in the way of management costs, what would be the best way to go about that?

529s are out because they can only be spent on accredited schools, and if the minor in question wants to use the money to pursue a perfectly good career which doesn't require a 4 year degree (e.g. master carpentry) I don't want to eat the giant tax penalty. I'd rather eat the small tax penalty now and have the flexibility later.

posted by paul_smatatoes to Work & Money (2 answers total)

You're probably aware of this, but having large amounts of money in the minor's name outside of a 529 can dramatically affect financial aid if family income and parental assets would otherwise allow him/her to receive aid. Just making sure you factored that in. (I also don't like the limitations of a 529 so am keeping my kids' college savings in a mutual fund in my name.)
posted by metasarah at 11:41 AM on December 31, 2016 [1 favorite]

Best answer: A UGMA/UTMA account (Uniform Gift/Trust to Minor Act) via one of the big institutions like Vanguard or Fidelity is the traditional answer to this. They don't have to be used for education, but they don't get any tax breaks and as metasarah notes, if they do go to college the money will be weighed more heavily in financial aid calculations since it is the child's asset. Finally, the gift is irrevocable and once the child reaches the age of majority the money is theirs, no strings attached. These were a lot more popular prior to the introduction of 529s.

If you don't want the tax benefits, it might make more sense to do what metasarah is doing--keep the money under your own name and then gift it to the child when the time comes (up to 14K per year annual gift tax exclusion, or you can make a larger gift under the lifetime gift tax exclusion). Finally, you can pay tuition directly to a school and still use your 14K annual gift exclusion for something else.

Here's a Vanguard chart that compares the various vehicles for college savings.
posted by The Elusive Architeuthis at 12:10 PM on December 31, 2016 [2 favorites]