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Financial Matters for Parents
How to Start Planning for Your Child's Future
By Jean H. Manrique
"If the account is in the parents' name, they can choose what time is appropriate to give a monetary gift to the child," Nohr says. Having the account in the parents' name also works for the child's advantage when Junior applies for financial assistance.
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Bank fees for maintenance of the account are one of the disadvantages of a UGMA, whereas many mutual funds companies have no fees. Equity based investments and mutual funds have historically proven to offer the largest return over a long period of time.
Knoll cites a Standard and Poors 500 Index Fund as an example of an indexed mutual fund that would be a good saving vehicle for Baby. An S&P 500 is diversified along asset classes and does not try to compete in the stock market, according to Knoll. Therefore, it's a safe and steady way to increase your money. "If parents put $5,000 into a bank savings account at 4 percent interest when Baby is 1 year old, Junior will have $9,800 when she turns 17," Nohr says. "If put into a mutual fund, however, at 10 percent interest, Junior will have $27,000."
Another option is a trust fund, and there are many ways to set one up. According to Nohr, inheritances are, on average, spent within 17 months of inheriting. Parents or grandparents can set up a living or testamentary trust and stipulate conditions. "For example, Junior can have one-third of the value of the trust at age 21, receive half of what remains at age 30 and the remaining half at age 35," he says. "It's a way to save kids from themselves."
While "trusts are very flexible in their use for education funding, they can be expensive," Knoll says. "There are costs associated with their creation and continued administration; for example, the necessity to file an income tax return on the trust each year."
