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Skipping the Inheritance, Creating Income Streams For My Kids

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Learning Finances

Creating An Income Stream

Life is complex and we never know what will happen from one day to the next.  So I thought a long time ago that instead of saving money for a future inheritance for my kids, I would create them an income stream and educate them on how to keep it flowing.

The income stream that I create won’t make them rich unless they contribute to it and make an effort to manage it wisely.  I know the value in having a person hustle to make a living and challenge themselves.  Just giving money to your kids or an income stream in my case, could limit them in their efforts to make money in the future.  Kids need to learn what it takes to get ahead, and if money is just given to them that defeats the lesson.  Besides money earned is much more rewarding than money received by other means.


The First Money Stream

At this early stage, the income stream I created for them is basically of the Stock Appreciation and Dividends type.  It has done well considering how little I contributed to it and the dramatic volatility in the stock market, but since this isn’t money needed to survive and kind of hidden from view, I can let all the chips ride or wait out downturns with no effect whatsoever!  My kids don’t even know that they have this money, and I don’t plan on telling the until them are 21.

After investing in more risky stocks and basically breaking even, I decided that the extra risk isn’t necessary for them.  After all, they won’t need the money until they are adults.  So I’m now investing in energy stocks and low beta stocks that have a decent dividend yield.  It’s a delicate balance though, I don’t want the kiddie  taxes kicking in, so I don’t want the dividends total to be over $900 a year.

Actually up to $1,800 wouldn’t be too bad either, my kids don’t work, so the additional $900 above the first $900 is only taxes at 5% (so far).


Why Create Income Streams?

Uncertainty!  Who knows what tomorrow will bring, so why not create a base to build upon?  This income stream won’t make them financial independent from a job or entrepreneurial pursuit.  But it will teach them about investment and put a little spare change in their pocket when they are an adult (if they want to use the stream for that purpose).

I’m actually hoping that they continue to build on the small base that I have created for them.  Hopefully they can become wealthy and financial independent with some smart, hard work on their parts!


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24 Responses to Skipping the Inheritance, Creating Income Streams For My Kids

  1. I think what you’re doing is a great idea and something I would want to do one day. I’ve been looking to set a trust and hoping that I will never have to dip into my Roth IRA (when I set it up this summer). I’m hoping that this trust will pass down through the family and if an emergency ever came up they could then pull from it.

    -Ravi Gupta

    • Originally I shot for the moon, but that was too much risk. The value of their accounts dropped like a stone during “the Great Recession”, but has since recovered. I was fortunate in that I could and did just let it ride for the most part. So today without adding any more, it’s positive again by quite a bit.

      But now I’m just going to go with lower beta stocks. It’s too sickening seeing your kid’s stocks drop… even if they do come back after a few years.

    • I’m hoping when they are 21.

      They’ll be in for quite a surprise that day. Hopefully I will have taught them well and they won’t go all crazy with it and buy a new car or something…

  2. Very interesting idea! Involving them in personal finance and the stock market is always a good idea. What do you do, if they are not interested?

    • If they are not interested, I keep the money for myself (lol).

      Just kidding, actually if they decide that don’t want to manage it, I’ll suggest that they put it in a ETF or some type of mutual fund that does a re-balancing act occasionally.

    • They both have a knack for number (their math skills are out of this world). Hopefully the math skills evolve into financial cents (lame joke, sorry I couldn’t resist).

  3. If parents would put half of what they now spend on birthday parties and Christmas into high dividend stocks beginning at birth-they would be amazed at the amount of money would be available for their kid at 21.

    And they would feel no pain financially. Great idea!

    • If they put the stream that I’m creating into a Roth IRA, and get a decent return and don’t touch or add any more money to it, they should have over 2 million by the time they retire.

      I doubt that they won’t touch it though.

      But it’s a very possible scenario, of course they would need a pure 9% return (which a Roth IRA might be able to provide).

      We’ll see… 🙂

  4. This is a very good concept to learn for kids. We’ve let our boys know which stocks they had to their name, and as a result they’ve become quite interested in investing and saving.

  5. This is an excellent idea. If they are going to or have already reinstated the inheritance tax then it may lead to our children having to pay again for money we’ve already paid taxes on! It’s very unfair. But, having a plan like this is insurance that our kids are taken care of.

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  7. I’ve been thinking about doing this as well. We have a Tax Free Savings Account here in Canada that we can contribute $5k/year towards. All withdrawals are tax free.

    I am using it to build up a portfolio of dividend growth stocks and by the time I’m ready to retire it should be throwing off about $40k in dividends, not to mention the capital appreciation.

    I just want to live off the dividends (along with my pension and retirement account – 3 income streams). When I die, my kid will inherit the portfolio and will only have to pay tax on future gains. Hopefully they can just withdraw the dividends and leave the capital untouched like I plan on doing.

  8. Really awesome idea. I wonder what the survivorship costs and tax implications will be when passing down inheritance? I guess a tax attorney would best answer that question, but definitely an interesting take on things.