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Figuring out what to do with this summer's IRS windfall won't be a problem for many parents. Some part of most family's checks probably will go to buy clothes, backpacks and other back-to-school goodies. But if you've got a little breathing room, this is a chance to do something special with your money.
Parents of children under 17 will get checks of up to $400 per child that are supposed to arrive in late July or early August. Most people will get a check if they qualified for the child credit on their 2002 tax return, although it will be offset by any back taxes owed or certain other delinquent debts, such as child support and student loan payments.
Here are some ideas for spending or setting aside your windfall if you are fortunate enough to be getting one:
Give your child an incentive to save some of this summer's allowance or earnings by offering matching grants. For each dollar your child saves, you might provide 50 cents, $1 or $2, depending on what you think is appropriate. Set the match amount in advance and let your child choose what to buy. This works particularly well if your child has been salivating over a bicycle or expensive pair of shoes.
Buy a new computer for the family and hope it will be used for school work at least part of the time. Children who don't have access to a computer at home are at a significant disadvantage to their classmates.
Open an account for each of your children with the Florida College Investment Plan, the new 529 tax-sheltered savings plan brought to us by the creators of the Florida Prepaid College Plan. You can open an account for as little as $25 and choose among investment options similar to mutual funds. The plan is not guaranteed. For information go to www.florida529plans.com or call toll-free at 1-800-552-4723.
If investment risk turns you off, buy savings bonds in your name with a child as the beneficiary on each bond. Down the road you may be able to cash them tax-free for college tuition. New I bonds now earn 4.66 percent and EE bonds 2.66 percent, but rates change every six months. For more information go to www.savingsbonds.gov or ask at your bank.
Q. My dad, age 83, owns a condo that he has told me I will inherit. I plan to keep it and rent it out. Should my name be on the title?
Q. Can mutual funds be held by more than one person? I would like to invest in mutual funds for myself, my wife and my adult daughter in a joint survivor form. If this is possible, what are the various aspects that one should consider in such a move?
These two questions reflect a common desire to avoid probate by titling assets jointly with children. Generally this is a bad idea.
The first thing to keep in mind is that jointly-owned assets are subject to the claims of both owners' creditors. If the son or daughter gets sued and comes up on the losing end of a court judgment, guess whose assets the creditor will go after? Florida law protects homestead property from creditors' claims, but this protection does not extend to financial accounts.
Joint owners also have legal rights. That means Dad can't sell the condo unless his joint-owner son agrees. If you close a mutual fund account and have the proceeds sent to you by mail, the check will be made out to all of the owners.
The third issue is taxes. When you inherit property, your tax basis clearly becomes the value at the date of the person's death. You owe capital gains tax only on future appreciation. When you are given property, your tax basis is the same as the giver's tax basis - what he originally paid for the property, plus improvements.
But when you try to avoid probate by putting other people's names on property, you muddy the legal waters. Maybe it was a gift and maybe it wasn't. Circumstances have to be taken into consideration. Your heirs and the IRS could end up arguing about this if it makes a difference in estate taxes or in the capital gains taxes owed by heirs.
Probate of homestead property being left to your children is not a complex process. Bank and brokerage accounts can be set up as "payable on death" to a beneficiary, although I do not recommend this if you have more than one beneficiary.
Before you start changing titles on property, talk to a lawyer. Consider setting up a revocable trust to hold title to property, particularly if you have substantial assets or complex holdings such as out-of-state real estate.
- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.