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Investments for children
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April 6, 2000: 11:09 a.m. ET
Turn those monetary presents into a mutual fund portfolio for the future
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NEW YORK (CNNfn) - So a newborn in the family is already building a nest egg. You might be wondering how best to invest the baby's monetary gifts and in whose name.
In response to a reader's question, Barbara Steinmetz, a certified financial planner in California and a member of the Financial Planning Association, suggested putting the money in a family of funds, and considering the long-term effects of having it in the child's name.
Ask the experts a question
Our 4-month old grandchild has received $1,000 in monetary gifts from friends and relatives. Her parents are interested in investing the money in mutual funds. What are the alternatives for registering the account? Do they put the account in the parent's name or the baby's name? What are the pros and cons of each alternative? Also, what are some good choices in funds?
Since the child is a minor, you will need an adult to contract any transactions on the child's behalf. The simplest way to accomplish this is to open a custodial account under the Uniform Gift to Minors Act (UGMA).
Any dividends and capital gains generated by the mutual fund investments will be reported on the child's Social Security number. It is important to remember that when unearned income exceeds $1,400 per year (indexed for inflation) for any child under the age of 14, the excess will be taxed at the parents' marginal tax bracket. This is referred to as the "kiddie tax". Obviously, at this time with only $1,000 to invest it will be not be an issue.
Another alternative would be to establish a trust for the baby, a more expensive alternative, or by utilizing a UTMA (Uniform Transfer to Minors Act). The titling may also be dictated by the state where you reside.
The problem with titling the assets in an account in the child's name is that eventually, when the child goes to college, any assets in the child's name will be considered available in the event they are seeking a need-based scholarship. Additionally, the custodial parent has a fiduciary responsibility to manage the funds in a prudent fashion for the child's benefit.
As to the selection of funds, with $1,000 it will be difficult to diversify at this time, but I would suggest putting the money into a family of funds with a wide selection for the future or with a company such as Charles Schwab where there is a wide selection of no-load funds available. Most funds will require a minimum of $1,000 to open a custodial account -- although there are exceptions for on-going commitment of contributions. To begin, it would make sense to look for a large cap fund with a good track record, such as a Janus Fund, or an index fund such as a Vanguard 500.
Be sure to have all dividends and capital gains re-invested. As the baby receives additional gifts, you can look to other funds to diversify the portfolio. The baby, obviously, has a long time horizon -- but you want to establish a substantial core holding before looking toward more aggressive investments. 
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