Tuesday, July 03, 2007

Carl's Other Project...

Lately if you are a regular reader of this blog (the few... the proud) you might have noticed that I haven't been posting as much. This is due to the fact that I have been cleaning up and upgrading some of my side projects.

One project is a web site I run called "Trust Funds for Kids" which can be found at


A few years back I decided that it wasn't likely that I'd have kids so I decided to do something for my nephews and nieces. Starting when they were 10 years old I'd set up a trust fund (or UGMA / UTMA as their officially known) and put in a certain amount of money every year and then if they put in money I'd match their contributions.

I used the "match" formula because I thought it would be a better incentive for them to care about the financial performance of the fund because they'd have a stake in the outcome. I heard horror stories from friends of mine who gave money to relatives only to have them keep coming back for more and to show little / no gratitude.

The "match" concept has turned out very well. The kids have been diligent about saving and seem to care about the stocks that we select. I give them a list of stocks (6) to choose from and they select 2 each year, which get added to the portfolio. I use my financial knowledge to pick the 6 stocks, but it is 100% up to them which of the stocks that they want to choose. This eliminates the "Disney" effect where kids pick what they know.

The goal of this is to 1) save up some money that the kids can use for college or whatever they choose (it is their money at 21, after all) 2) have them learn something about investing. Schools generally don't teach anything useful like how the financial system works and how to select investments, so this is my way of educating them instead. I didn't want to use 529 funds because they don't give you freedom to choose stocks the same way that you get in a brokerage account (and fees are high, but that is another story).

The performance of the funds (knock on wood) has been outstanding so far. Both of the funds (the funds start when they are 10 so one has been going for 6 years and the other for 3 years) have been beating the S&P 500 index which is nice, but I don't count on it. I hope to continue the run in the future. You can see the two portfolios and their performance on the site along with stock selections for 2007 and recent past selections.

I have been focusing on tax (spending hours, no less) trying to understand the impact of recent IRS tax changes on UGMA accounts. There is a section at the site and I am expanding it. I need to help my nephews with their taxes and need to know what I am doing. This is a major pain in the rear... you'd think the government would make it easier to save and invest, not harder.

Before I get a bunch of comments on these topics...

  • Yes, the UGMA has tax problems relative to a 529 account. There are ways to mitigate this to some extent and the UGMA is good for my purposes but may not be the best vehicle for you
  • The UGMA route also may impose financial aid impacts in that assets in the childs' name count against them more than assets in the parent's names. This could change in the future and there are some ways around it (basically convert to a 529 prior to college) but this is a consideration too
  • I don't have my "main" portfolio in individual stocks. I use index funds (ETF's, to be specific). I use individual stocks in the trust funds because they are a good teaching tool for kids since "baskets" of stocks are harder to understand. But if I keep beating up on the indexes (doubtful) then I may re-visit this...
If you have any comments on that site you can send me an email at the address on the site or leave comments on the post.

1 comment:

Dan from Madison said...

Very good site. I use 529's for my kids, but of course they aren't learning anything from it either, just will reap the benefits when they go to school.