Identify This Investment
Posted on June 19, 2006 by Her and tagged investments
I need help to identify a mystery investment.
My grandmother is a wealthy woman who has always had access to professional financial advice. About twenty years ago she set up some sort of estate plan that involved her children and grandchildren, including me. An account was set up for each of us. She has never spoken of it to me, but I am aware of its existence because I have been paying taxes on it every year. Now that I am an adult, and would like to have an accurate understanding of my finances, I am trying to identify this investment.
Here's what I know:
The investment is in her name, and I am also identified in some capacity. The investment earns around $300 a year in dividends and these are withdrawn by my grandmother. The dividends have been pretty constant, leading me to believe that the account value is also pretty stable. I pay the taxes on the dividends every year. I know that my grandmother had a good financial planner who may have helped her use some complicated or rare investment strategies or products. I have passed all the "milestone" adult birthdays, such as 18 and 21, without her mentioning the account to me, so I now believe it is meant to transfer to me after her death. However, she did transfer ownership of my parents account several years ago. My parents liquidated the account and paid off about $20,000 in debt. (My parents don't know much about finance and don't know what kind of account it was.)
Here's what I suspect:
I know that you can use a "charitable remainder trust" to make a donation to a charity, whereby you get the tax deduction for the gift but you get to hold the assets and profit from the gains until your death. I suspect she may have set up something similar for us.
Why not just ask grandma about it? Because I love her and respect her. If she wanted to discuss it with me, she would have. I think it would be in very poor taste to inquire about what I now believe is part of her will. On the other hand, I feel that I have a right to know why I am paying my grandmother's taxes every year. So rather than ask her, I am asking all you educated personal finance bloggers to help me solve the mystery discreetly.
I want to know...
What kind of investment is this? How much might it be worth? How might this affect me (with taxes and other regulations) when I do become the owner of the account? Is this an investment I could hold and grow or something I would have to liquidate upon receipt?
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I have no idea what this is. But it is strange. If your grandmother is taking the income off of an investment, why would she have her grandchild pay taxes? Something is screwy here.
My grandmother set up funds for all of us, but our income off of the investments added to our investment and we claimed the income on our personal returns.
I would suggest next year at tax time, talking to grandma. I would say something like - "Gram, my accountant is asking me where this income is I am paying taxes on. I told him/her I don't know." Wait and see what she says. If she doesn't talk specifically about the investment, you just might learn other interesting facts like.
I started this account when I got my first job earning $1 an hour and it has always been my wish to pass the money on. So, I just use the interest and am leaving the principle in tack.
This could be one of those good memories you get and charish forever. I know my grandma saved our money from a job she only made $6.35 per hour max. It sure does make me appreciate what she put away and how she sacraficed for us.
I am agreeing with D, and I think that blaming it on a 3rd party, like your Accountant, is a great idea. I think you have a right to know if you're paying taxes on it! It's also possible that some paperwork was screwed up, so not asking all this time could mean taxes that you never really owed.
I think you should definitely find out what this account is all about. It is very screwy that you have been paying taxes on it, but not receiving the dividends yourself. Since there are ways to pass on an estate almost tax free over time through trusts, without making the heirs pay the income taxes, it makes me think she had an estate planner that was not very competent. If this is the case, you will want to get any issues ironed out before she dies.
Are you reporting the taxes on your income tax returns, or are you simply paying for the portion on your grandma's tax returns that are attributed to this investment? If it is on your taxes, you would likely have to be the owner of the account. An annuity or a type of paid up life insurance could be a transfer on death, owned by one party, but based on the life of another. Owner would pay the taxes.
I think D's approach is right on the money.
Also, as far as the value of the account... I would guess, based on the fact that older people tend to be pretty conservative with their investments, that it is worth somewhere in the neighborhood of $3,750 - $6,000 ($300 / 5% = 6000 and $300 / 8% = 3750).
Regarding the taxes - Each year at tax time I receive a Form 1099-DIV from my grandmother's brokerage firm. It is addressed to both me (as "Recipient B") and my grandmother, but lists only my social security number. I report this as dividend income and pay the taxes on it. It's not a big issue since it is so little money, but still...I am curious as to why I am responsible for the taxes.
scttb | Jun 19, 2006
If you pay the taxes then you own it and should enjoy the benefits. Ask for the account or ask for the taxes - its just business. Tat's why its in your name.
Christiana | Jun 20, 2006
I agree with everyone else - you should talk to your grandmother about it. Esentially, at this point, she's making you pay taxes on her money if she's taking the dividends on it and keeping them. Blame it on your accountant if you need the buffer. I get that you don't want to seem disrespectful, but if it is effecting you (by way of taxes) you have the right. In some ways it seems pretty shady, like her accountant showed her how to get free money by passing the taxes on to you.
It does seem a little off that she gets the money but you pay the taxes.. she should at least offer to pay them for you. It might be that she is trying to spread out the tax hit if all the other children and grandchildren are also paying taxes on amounts she withdraws. Do you have any cousins that you could ask whether they are getting the same deal?
Certainly this is "messed up" that you have an account she gave you but you don't understand. Perhaps she thinks your parents explained it to you or something....
How do you know your grandmother is withdrawing the dividends? The 1099-DIV won't tell you that.
I would just guess it is some sort of trust account in both your names.
My grandmother set up UGMA accounts for us. When we finished college, we were given control of them. But my mother kept control of my youngest sister's account for several years because she wasn't ready to take it over. My mother, as the trustee on the account, made withdrawals on behalf of my sister.
So it could just be a simple UGMA account with your grandmother named as the trustee. It's your income, so of course you would pay the taxes, but your grandmother can make withdrawals. That's illegal, though, if it's a UGMA. You can only withdraw money from someone else's UGMA for very specific purposes, and only for their benefit.
I can see how you would want to avoid approaching your grandmother. Another idea would be to just call the brokerage firm. You wouldn't even necessarily need to speak to your g-ma's broker. Just talk to whatever general receptionist answers the phone. Say you believe an account was set up for you at their firm when you were a child, and here's your social security number. Can they please tell you what type of account it is, what the balance is, and who else is named on the account and in what capacity? They might want more than a SSN. They may want your address etc. But you can say you've been paying taxes on it and you're just wondering what it's all about. Maybe your grandma would find out (from her broker) that you called, but so what? Then she can talk to you directly about it, which may be healthy.
Sharon | Jun 22, 2006
If you are required to pay the taxes on it, it's your money to enjoy now. The law can't make you pay taxes on anything that you have no right to possess in the present.
But you should think about what you are trying to accomplish here in the long run. Paying taxes on $300 worth of income is not that big a deal and a small price to pay for not offending grandma for now. But you should still call the broker or trust company who manages the account and find out what it is and what your rights are in it and why it was set up the way it was.
Jill | Jun 19, 2006
I have no idea what sort of account this may be, but I am extremely jealous at the possibility of one. I have been daydreaming about a hidden inheritance lately...
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