When a new child is born, the world seems full of possibility. With the myriad of opportunities available for the current generation of children, it seems that the sky truly has become the limit. For many relatives, contributing toward a long-term investment gift for a new baby is a much desired opportunity. These gifts will grow over time and transform into an extremely helpful base of financial support when a child reaches the age where it is time to pursue college education and other life changing adventures.
A variety of financial gifts for babies are available depending upon your specific interests and budget. Whatever your means may be, you are virtually guaranteed the chance to turn your best intentions into a wonderful financial gift.
If you are trying to find the perfect long-term investment to secure and generate wealth for a baby, there are no shortage of options available to you. Savings bonds, trusts and savings accounts are just a few of the powerful investment tools that can be set up as long-term gifts for babies.
Exploring Savings Bonds
One of the most popular long-term gifts for babies is a savings bond. A U.S. Series EE Savings Bond is a form of government bond that acts as a means for raising public funds in exchange for a guaranteed return on investment over a period of years.
Savings bonds can be purchased in values ranging from $25 to $10,000. The bonds are incremented at the level of the penny, meaning bonds are available at any monetary value within this stated range, such $25.32 or $9,456.47. This level of flexibility is ideal for individuals who may have allotted a very specific amount of money for a savings bond.
Evaluating Bond Maturity Rates
A Series EE Savings Bond matures over a span of 30 years, meaning that the bond will achieve full interest yield after this period of time. When a bond is purchased, the purchase price is half the value listed on the bond. For example, a savings bond valued at $50 can be purchased for $25.
Typically, after 20 years, the bond has accrued enough interest to reach its printed value. An individual can begin redeeming bonds after one year of ownership, although the return on this redemption will be significantly less. If a bond is redeemed in the first five years of ownership, three months of accrued interest must be forfeited.
Purchasing Savings Bonds
Yet another appealing element of the savings bond process is the ease with which they can be purchased. Although paper bonds were previously available through banking institutions, the most common method of purchasing bonds today is directly through the U.S. Treasury Direct website. After creating an online account, individuals can purchase and track their bonds throughout their maturity.
This method of online accounting can be particularly useful in situations where bond holders are planning on holding their bonds over decades. Whereas losing a paper bond in prior years could create a number of headaches for the bond purchaser, it is impossible to lose track of a bond purchase electronically though the Treasury Direct website.
Baby Savings Account Gift
Opening a savings account is yet another viable option for adults who are hoping to store and generate wealth for a newborn child. Savings accounts act as a low-risk financial platform for generating wealth over a period of years. Given the high degree of security inherent to savings accounts, these particular investment platforms have a relatively low interest yield. That being said, even modest deposits into a savings account over years can result in a high degree of return over time.
Given the legal requirements of account ownership, a savings account opened for a newborn child will technically not be their account. These savings platforms can only be opened by legal adults, meaning that a guardian or caretaker will be responsible for maintaining the account until the child reaches the age of 18.
Technically speaking, a savings account opened for a child is no different than a savings account opened for any other individual. Again, the main requirement for creating the account is that the account owner or co-owner be an adult.
Evaluating Interest Rates on Savings Accounts
In recent years, interest rates on savings accounts have reached historic lows. Because of this, the yield on these accounts may not be as competitive as other low-risk investment vehicles, such as an individual retirement arrangement. Instead of opening a savings account, some parents may find that the amount of money they have generated through their own retirement account is worth far more than the funds they accrued in a savings account for their child. In this situation, funds from an IRA could potentially be withdrawn after the age of 59 1/2 and gifted to the child in question.
Interest rates aside, opening an IRA specifically with the intent of saving the funds to gift to a child at a later point might end up causing a fair share of headaches. For example, if you open a Roth IRA, you will be required to pay tax on the money you deposit for the child immediately, while this is not the case with a savings account. Similarly, you will be required to pay tax on funds deposited in a traditional IRA at the moment they are withdrawn.
In either situation, you are essentially creating a taxable event where, in other circumstances, no such problem would exist. For example, funds can be deposited and withdrawn from a savings account at any time without necessarily creating a taxable event. Ultimately, your decision to pursue either a savings account or IRA will depend on your own long-term goals and your preferences related to tax obligations.
Establishing a Trust Fund
Trust funds are an immensely popular method for creating a long-term financial platform for a child that will allow them to access the funds they need when they reach adulthood. That being said, there are specific types of trusts commonly used today, each with its own specific strengths and weaknesses. Understanding your options when it comes to establishing a trust will ensure that you have the information you need to create the best possible financial arrangement with respect to your own assets and finances.
By definition, a trust is a legally-established arrangement in which assets are held and managed for the benefit of a third-party. During the active management of a trust, there are three key roles and responsibilities: the grantor, the beneficiary and the trustee. The grantor of the trust is the individual who originally arranges for the establishment of the trust and places the assets to be held inside of the trust.
The grantor creates the trust for the exclusive benefit of the beneficiary. This is the individual who has been selected by the grantor to receive ownership of all items within the trust at a point in the future. Once the grantor has placed the assets inside of the trust for the beneficiary, it is the responsibility of the trustee to actively manage them and ensure that they are used explicitly for the stated objectives of the trust.
Understanding Revocable Trusts
A revocable trust, also referred to as a living trust, allows the grantor of the trust to modify the assets located in the trust freely throughout his or her lifetime. The most common use of a revocable trust is to pass assets down to grandchildren or children. This is due in large part to the fact that the grantor of a revocable trust can also act as the trustee if they so choose.
This arrangement allows them to exert considerable influence on the trust during their lifetime and ensure that assets are creating the desired level of profit and growth as needed. Once the grantor of the trust passes away, the assets in the trust will be passed to the beneficiary. In situations where the grantor is still alive at the time the beneficiaries are scheduled to receive their assets, the grantor has the opportunity to distribute and modify the nature of the trust withdrawals as they see fit.
Defining Irrevocable Trusts
Unlike a revocable trust, the grantor of an irrevocable trust cannot modify or withdraw assets once they have been placed inside the trust. This is due to the fact that an irrevocable trust acts as its own taxable entity. Items deposited inside of an irrevocable trust become the exclusive property of the trust itself rather than any single individual. With these ideas in mind, irrevocable trusts are generally considered to be a more energy-intensive endeavor for all parties involved.
Once the irrevocable trust has been established, the trustee will manage the assets just as they would in a revocable trust. When the grantor of an irrevocable trust passes away, it is quite common for the process of distributing trust assets to beneficiaries to avoid probate entirely. A nearly identical situation applies to revocable trusts.
Choosing a Revocable or Irrevocable Trust
When it comes to preparing an investment gift for children, the individual choosing to establish the trust should ask themselves specifically what level of involvement they would like to have in the management of this platform. If the grantor is fully prepared to deposit a single asset or grouping of assets and then simply "walk away" and allow the trustee to manage them, then an irrevocable trust is certainly a compelling option. However, if the owner of the assets is unsure how their opinions will affect the composition of the trust over time, a revocable trust may be a far better option.
Differences aside, the point should be made clearly that both revocable and irrevocable trusts allow individuals to create a protection method for storing and delivering assets to a child after they reach the age of adulthood.
Moving Forward With Gift Preparations
No matter which specific investment platform you choose to pursue, the chances are quite good that you will have an excellent opportunity to prepare a unique gift to improve a child's future. That being said, it may be worth your time to consult with a financial expert before you begin completing paperwork regarding your gift in order to ensure that you are aware of all stipulations and requirements related to the investment.
This is best exemplified in current tax law, which may require you to pursue a variety of different accounting methods as part of your gift. As with anything, taking the time to complete a thorough evaluation of an investment gift will ensure that you choose the best possible product for the child.
Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.