Hey guys,

I am expecting my first child in May 2010. I am an American and my partner is EU citizen. I expect our child will have both a Passport for USA and her Country. I mention my citizenship because Americans are expected to pay taxes on income earned abroad and we have capital gains taxes rather than wealth taxes

One thing I desperately want to do for my child is to begin a portfolio for him and only tell him about it when he is 30 or so (past the age when he might want to spend it on a pimped out car or some other item that is not a real asset).

Most of my investments are in the US, and I think the US offers still some of the best vehicles for active trading and savings.

I have thought about the following potential savings vehicles for my son, but I am not sure which or which combination would be best. Can you advise?

1. EUIL (Equity Indexed Universal Life) - an insurance policy which is free of taxes (on withdrawals) and used as a savings vehicle. Typically it has a floor of 0% and a ceiling of 15% pegged to the S&P500 index.

2. Trust fund - but who should manage it, what are advantages of trust vs just opening an account in his name and keeping it secret?

3. Open a Joint Account at "ThinkorSwim" and buy different indexes and trade options and just let it grow for him

4. Buy DRIPs (Dividend Reinvestment Stocks) for him in stable companys and add to the holdings slowly ($100 a month) over time (e.g Coca-cola, McDonalds, GE, and other good companies which have raised dividends consistently during past 20 years). The dividends are automatically reinvested into additional shares in the company and there are no trading costs. Good passive vehicle.

It would be important to avoid adding complexity due to US tax issues. I am not so keen to prepare tax returns for a 1 year old and to continue that for the next 30 years. If he never lives in the US, then I would question if he should pay taxes on his global income just because his father had a US passport. Plus I expect during the first 10+ years the capital gains and account values will be quite small

However, if I open accounts in the US, same place where my accounts are, then I do not want him to be put into a position of tax evasion because he has built up a portfolio of investments during his life and has a million dollar portfolio - he knew nothing about.

What advice can you give for an US Expat to help give his child a head start in life?

Hello,

As a first observation, if you are so concerned over US tax issues on this, perhaps you and your partner should seriously discuss whether your child should have US citizenship or not. It is not automatic unless both parents are US citizens. US is one of the only major countries of the world to tax citizens wherever they reside, thus your child will also have to deal with this when he becomes employed as well. And I might add be suject to the draft. We did not feel such an important decision should be made by us alone, thus children are not US citizens and we will let them decide on this important issue when they are old enough to make a conscious decision themselves.

As to your other points, the DRIPS have some advantage as you would not have realised capital gains until sold.

For 2., if you open account in his name, he legally would be entitled to it at the age of majority, usually 18, and could spend as he liked. Most banks can do a trust, but they can be costly to set up.

More than likely, unless you are talking about massive amount of money, the investment income would be below the child's tax threshold for many years, so the tax issue would likely not be until later years when you would have to file a return on his behalf. Of course, if large sums are involved, this would happen sooner.

Sorry can't give you advice on the options you listed. For our children, who also have US passports, we have opted for a 529 College Savings Plan.

They can be opened for a child from birth, you can buy into any US state's savings plan (some are better than others, so it is worth doing the research) and they are completely tax free should your child use them for his/her secondary education costs (this inlcudes not just tuition but things like accommodation costs etc).

The money can be used in just about any major educational institution in the world. This was important for us as we have no idea where our kids will end up going to college, so we wanted to make sure we could use the money not just in the US but here in Switzerland or in Australia, UK etc.

Each plan has different requirements. For example some need up front deposits, some need regular monthly contributions, while there are some that have very few minimum requirements.

The money is invested according to how close the child is to college age. So, when they are very young the investment risks are higher than when they are in their teens. You as the parent also have some say in how the money is invested and this can be changed throughout the life of the plan.

If the child is not cut out for university, the money can be either transferred to another child or withdrawn and at that point tax and some fees are calculated on the amount.

One of the other adavantages for us is that our US relatives can contribute directly to the plan instead of or in addition to sending gifts through the mail to us here in Switzerland. They're plans did pretty well over Christmas.

Here is a link to a site discussing the plans: http://www.collegesavings.org/advantagesOf529.aspx

Good luck and congratulations on your new arrival.

Thanks runningdeer


Good point about the US citzenship issues. Considering I am not really planning on going back, it might not be important to get him a US passport until he wants one.

The sums we are talking about are small. I wish it was otherwise, but wishing does not make the money appear

I like DRIPs but I think they might take withholding taxes out for non-US citizens thus he would lose 25% or so of the dividends just for not being a citizen. This is something I will have to clarify with the DRIPs I have already.

Also the EUIL is a US product and he would not be eligible if he does not have a Social Security number. I understand the UK also tried to launch EUIL but it did not gain market acceptance. So instead they have other Unit Linked life insurance products.