It’s Important to Communicate Generosity

It’s Important to Communicate Generosity

After nearly 29 years of helping families manage their money, I can definitively say that we Americans are for the most part just horrible about talking about money with our families. 

Now, don't get me wrong. I know families that like talking about “investing” but investing and money are two different topics. I often see the topic of investing being shared between male family members. For some of us, it's fun to talk about investing concepts and strategies and investing is one of the few topics where parents can enjoy learning from kids, and kids enjoy learning from parents. In a way, talking about investing resembles conversations about sports and politics, interesting and animated.

What I am talking about however, is talking about money. More specifically, the money parents have, and the planning and management related to this money. I’ve spent some time contemplating this phenomenon, and in the process realized that even I don’t like talking to my grown children about my money and can dance around the topic with proficiency. So, instead of pontificating about all of us being more open about our finances, I will skip the hypocrisy and just chalk this one up to one of life’s inescapable realities. 

There is one area of this topic however, which requires a higher level of openness between family members and where not being open about money can create a few challenges and even problems. The topic of grandparents putting money aside for the benefit of grandchildren.

At Oak Partners we do a ton of this work for clients. In my experience there are two primary methods for grandparents to save money for the grandchildren, the UTMA/UGMA account and the grandparent owned 529 college savings account. Both present unique issues if not communicated clearly to the actual parents of the children being benefited. 

In most situations, minor children cannot engage an investment firm to open an account because they are unable to enter into the agreements related to these accounts. So, when an account is opened for a minor the Unified Gift to a Minor or Unified Transfer to Minor (UGMA/UTMA) account registration is used.     

I don’t have the space in this column to go into the technicalities of the taxation of UTMA/UGMA accounts, but the bottom line is the dividends, interests and capital gains generated by these investments may be taxable and must be reported on a tax return.     

For several reasons, we do not often recommend setting up UTMA/UGMA to our clients, but we do commonly accept the servicing of these accounts after they have been established by other firms. Far too often we experience UTMA/UGMA accounts that have been “forgotten”, by the grandparent that set them up, have grown over the years and are now generating material dividends and capital gain distributions. Our common question when we encounter these accounts of “who is reporting the account on their tax return?” is not always responded to with an answer, which is an answer in itself.  

Furthermore, the transfer rules on UTMA/UGMA accounts are very specific.  The accounts must be transferred to the child at the age of majority, which is either 18 or 21 depending on the account title and state rules where it was set up. Financial regulators and financial services firms are getting properly proactive at making sure this occurs, but I recently encountered a 40-year-old who still had money in an UTMA account from her grandma.    Someone was not communicating. 

In addition, UTMA/UGMA accounts figure very prominently in the calculation of needs based financial aid from the government and colleges, and these accounts must be reported on the FASFA form for financial aid.   I recall one instance where grandma produced a statement indicating the college student’s UTMA account no one knew about owned a stock that had grown over 20 years to nearly $50,000.  Woohoo, but she produced the statement after the FASFA was filed and aid had been awarded.    What a mess.    Communication solves most of these problems. 

529 College savings plans can be more user friendly because ownership of the account can be retained by the grandparent, the gains and dividends are tax deferred and don’t need to be reported, and the accounts are much more flexible in the way they are reported on the FASFA. The challenge with these accounts however is to enjoy the full tax benefits of these accounts the funds must be used for education, and most of the time, who pays for college? Mom and Dad of course. 

So, if Mom and Dad don’t know the accounts exist, or what the balances in the accounts are, how are they supposed to coordinate the somewhat technical withdrawal process to utilize them properly? The answer again, is they often don’t, which can lead to unnecessary taxes when the accounts become subjected to withdrawals that do not qualify for tax benefits.    

We love helping grandparents be generous to their grandchildren and investing money for future generations can be a wonderful gift. But doing so, comes with the responsibility of communicating your generosity. Let’s not make this into the tough part.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.  Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at Securities offered through LPL Financial, member FINRA/SIPC