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Bringing up baby
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November 2, 2000: 11:02 a.m. ET
Put monetary gifts for newborns into a trust fund or custodial account
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NEW YORK (CNNfn) - Opening a custodial account is a good way to make sure the younger generation is provided for. Trust funds are also an option. Just remember that if you title the fund in the child's name, it could affect his or her ability to secure a need-based scholarship for college later on.
In response to a reader's question, Barbara L. Steinmetz, a certified financial planner from Burlingame, Calif. and a member of the Financial Planning Association offered some tips on using the Uniform Gift to Minors Act and socking money away for your newest family member.
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 if there is one here with titling the assets in an account in the child's name, it 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 a $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 (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 reinvest.
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.
FPA
CNNfn: investing 
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