If you had a fixed, fairly large sum to invest with two kids getting near college age. I’ll try to give all of the variables, even though I might be off on some or all of them.
Grandparents give some money to their daughters, somewhere between 75-100k net each. First daughter has two children, one is just finishing ninth grade, the other just finishing seventh. Second daughter has two children, one just finishing sixth grade and the second just finishing fourth grade.
The two children of the first daughter will most likely attend college. Their parents earn a pretty decent income, but nothing lavish.
The oldest child of the second is somewhere on the high functioning autism/Asperger’s spectrum and most likely won’t ever attend college. In fact he currently requires special classes and may have special needs throughout his life. The younger child of the second daughter will most likely attend college. The mother of the second set of children is a widow whose husband’s life insurance settlement has allowed her to live comfortably but not lavishly.
The daughters are considering investing together, about $150-200k in rental properties to provide a steady income stream.
To me this seems as if it would probably benefit the second daughter more, as her son will need a steady income stream over his life. Also there is more time to reinvest any income for the daughter who is about 8 years away from college into secondary investments.
Also, I’m curious if there are other drawbacks for one or both of the above in terms of how college financial aid departments look at the assets and revenues involved.
Is there a way to optimize for both, or should they keep their funds separate? FWIW, the sisters (parents) get along quite well and there is nothing to suggest that one is trying to get anything over on the other.
This situation is semi-hypothetical, in that I think it’s the case but I don’t have all of the facts yet.
I don’t think will end well for many reasons. One thing is confusing me. Was this money given to the sisters and they decided to use it for college funds? Or was given to them with the instructions of you will use this to fund your children’s education? If the later, I don’t think they should be putting it in property.
With only $150K-$200K to invest, I’d steer clear of rental properties. Depending on your location, you’d probably only be able to buy one or two houses outright, which is the best way to invest.
Two houses = two tenants, and if you go a long-ish time without tenants, you’re losing money through taxes, maintenance, etc. Good money is usually in multi-unit properties, which are priced much higher than your hypothetical nest egg. Plus, you’d have to figure in either time spent managing them, or the costs of paying a management company.
Honestly, with college on the horizon and possible long term care, I’d just bank the money. It seems crazy, but $100K doesn’t go that far nowadays. For example, with a 4 year college, that’s only $6,000 a semester, which is easily eaten up by even a state public college.
The origin of the money, as I understand, was to sell a plantation that the daughters’ parents owned as seed money for higher education. That was several years ago. As far as I know the money is not stipulated as such, and the parents did not specifically stipulate how the money should be used. They could, if they wanted, just fritter the money away, but that’s not the implicit expectation.
Depends on the kid (speaking as the parent of a kid with Asperger’s / autism). The kid might not be able to go “away” to college depending on his coping skills etc. but he could probably go to a community college or local 4-year college. However, he might not even be high-functioning enough for that. We don’t know enough about the situation.
Depending on how the money is gifted to the sisters / grandkids, for the special-needs kid they should look at setting up a special-needs trust for that child; I’m not a lawyer or trust specialist but this is what my brother and I were advised to do for our respective special-needs sons. If the money is held in the child’s name otherwise (e.g. in an UTMA account) it’s considered his and would impact his access to disability money from the government.
If the money is invested in properties in the two parents’ names, that’s a different thing. That would (hopefully) yield an income stream but that income is not likely to be enough to put anyone through college. They’d have to make up the shortfall somehow.
I don’t know how real property counts in the FAFSA calculations. If they instead hold the money in, say, mutual funds, that is expected to be tapped to pay for college. If they hold it in UTMA-type accounts, even MORE of it is expected to be tapped - which is fine, that’s what it’s for.
Special needs trust for the Autism. Seriously. You want this in a safe place as opposed to say platinum speculation. There are any number of autism support groups that can give better advice.
Because it’s not a long time until college, I’d put this into treasuries or an equivalent. IMHO you don’t want to mess around with market risks for something like college money. Again, legal advice might be good to look at how to gift the money annually to avoid taxes, put it into a college IRA type vehicle, or even not gift it until financial aid is finalized (give it now, the grandchild may have too many assets to get loans or other aid).