Thursday, August 24, 2006

Update on my Brother

If you follow my blog, you will know that I was expecting that there would be some kind of settlement in my father's divorce whereby I might become the custodian of some money to be set aside for my now four-year-old brother when he gets older.

It has been interesting so far in trying to determine what the next step is going to be if that money comes in. However, the point might be moot since it is unlikely that there is going to be any money that actually comes out of the divorce settlement for him anyways.

But, in my world, better safe than sorry when it comes to stuff like this so I went on the net and found out a couple of interesting things. One of the key items when it comes to managing money for a minor is the age of majority. This is different in every state, but in this case, in massachusetts, it seems to be eighteen from what I've read.

Assuming that this is the case, whatever I do with the money, whether it be invested or placed in another kind of account, it would become his on his eighteenth birthday. However, I am nervous about this kind of situation. Right now, it would seem that my brother may end up having some issues with money as he grows up since the financial situation of both his parents seems dire. The prospects of investing cash to give a big chunk of money to my brother at 18 makes me really nervous.

I personally would like to see the money set aside for some kind of retirement. It sounds a bit absurd, but at this point there is no knowing if he will ever go to college and he may not want or need to. And I think that his parents and family will likely help him with other small expenses (perhaps even helping him get his first car) as he gets older. So what is left?

I've gone on websites that talk about investing for the long term and how small amounts of money can add up to hundreds of thousands of dollars if left for periods of 40, 50, or 60 years in the market with an average annual compounding interest rate of 10%. So that was really what I was hoping to setup.

The Fly In The Ointment

One major issue with this plan is that this money needs to be earned income in order to go into a retirement account. In general, it is taxed at the parent's marginal tax rate. However, it seems rather silly to have him earning money at age 4.

A Possible Solution

One idea that I've had that I need to find out about is the idea that the money could be put into a trust that has my brother as the trustee, but myself as the person who is in charge of it. And the trust could be setup such that he has no control over the money except for small increments as he grows older, and perhaps when/if I die, the full control goes to him. But for this type of arrangement, I would have to consult a lawyer.

A Plan for Now

While I wait for this to get sorted out, one option that I've become involved in recently is the idea of Upromise. I created an account and have sent links to my friends and family members that do not have kids etc. The account will generate money in a tax free account for educational expenses. Since it is free money, I think that it is likely that this money will go to my brother's college, since I hope he goes. But if not, I could use it to take courses or give it to a niece or nephew. The bottom line for me here is, its free money! It doesn't really matter so much who uses it, as long as someone gets some benefit!

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