Investment Accounts for Young People
by Selena Maranjian (TMFSelena@aol.com)
Wednesday, August 27, 1997

How can your kids actually invest? Well, they're not allowed to have brokerage accounts of their own until they turn 18, but in the meantime, there are several methods available, ranging from the informal to the formal. They're all easy to set up -- simply call your brokerage and ask for the paperwork. Here's a quick review:

Trust Fund: If you set up a trust fund for your child, you would deposit money into it and then manage it yourself or pay someone to manage it for you. The trust fund is set up to become the property of your child, but he or she can't take control of it until reaching an age you specify. (The age can even be something as wacky as 40.) Some trust funds are set up to give your child a set amount each year, while others give them the full amount --once they reach the required age.

UGMA Account: UGMA stands for the Uniform Gift to Minors Act, which spells out exactly how investment accounts can be set up for young people. Most stocks bought for young people are set up in UGMA accounts. As with the trust fund, the investments belong to the child, but he or she has no control of them until the age of 21. Until then, a "custodian," most likely a parent, calls the shots. Custodians can also withdraw money from the account, for the benefit of the young person.

Joint Brokerage Account: This is a brokerage account that you can open with your child that you would control until the child turns 18. Note, though, that someone will be taxed for any gains on this account and whoever's social security number is used for the account is responsible. Since your child is probably in a lower tax bracket, his or her social security number might be the best one to use.

DRPs: Dividend Reinvestment Plans (DRPs) are a terrific way for people who don't have much money to invest in stocks. While traditional DRPs require you to own at least one share of a company before you open a DRP, there are some "Direct Purchase" plans that allow you to buy your very first share directly from the company. To open one of these accounts, decide which companies you'd like to invest in, then call them and ask if they offer a DRP or Direct Purchase plan. If so, ask them to send you the forms you'll need. Keep in mind that your DRP will probably operate like an UGMA or joint account. Find out about these details before opening the account. You can find out more about DRPs at the Fool's DRIP Portfolio area.

Investing Through Parents: If you don't want to go through the trouble of opening up a special account, you might be able to work out some nice informal arrangements with your kids. For example, you can "sell" some of your own shares to your child. For example, if you own some shares of Gap, you can sell your child $100 worth of shares (currently about 2 shares). Alternatively, if you're about to buy 50 shares of Microsoft and your child wants to buy a share or two herself, you can just place the order together -- and order 51 or 52 shares through your broker. Not everyone knows this, but you don't have to buy round numbers of shares -- "odd lots" are okay. If you do these things, you'll want to keep a good record of which shares belong to whom. Once your child turns 18, he or she can open her own account at a brokerage and you can transfer her shares to it.

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