We are grandparents and want to start mutual funds for our six grandchildren, aged four months to 18 years. We want separate funds for each of them, and we’d like to start with minimum amounts. We would like to have the money invested for the long term, perhaps to get a start on their retirement, and we want to retain control of this money so that our grandchildren can’t get their hands on it and spend it when they reach 18. What would you recommend?

Paul's Answer:

Your objective is a little unusual, because most parents and grandparents we hear are interested in starting college funds. But you are perhaps thinking that your grandchildren will somehow get through college one way or another anyway, and you'd like to do something longer-lasting.

I think this is a very worthy goal and it reminds me of something that my wife and I have done for our own grandchildren to finance their eventual retirement years. You will find details, including the actual legal documents we used, by visiting our Web site and looking in the newsletter article archives for a piece called "The Best Investment I Will Ever Make."

The "normal" best way to fund a retirement is through a Roth IRA, so the money can build up tax-free. But this is not practical for your younger grandchildren because (I'm guessing) they don't have legitimate earned income of their own that would qualify them to open an IRA. And it is not practical for your older ones, because once they become adults they are free to cash in those IRAs and do whatever they want with the money. And then your long-term hopes for that investment could go up in smoke.

In order to make the investments now and to keep control of the account, you will have to give up the tax benefits of the Roth IRA. But that should not be an overwhelming consideration for you.

Here's my suggestion. Since you want to invest a small amount of money, give each grandchild an equal amount. Whatever you have available for this project, split it six ways, in other words. I think an excellent choice of mutual funds would be the TIAA-CREF Growth Equity Fund or its similar sibling, the Social Choice Equity, a "socially responsible" fund, if that appeals to you.

These funds are well run by a company with more than 80 years of experience managing retirement money for school teachers and other public employees, so they know what they are doing. We often recommend these funds for children's accounts because they have a $250 initial minimum deposit requirement. I hope you can put more than that into each of your grandchildren's accounts, but that minimum makes these funds accessible to many people who could otherwise not afford to use a mutual fund.

The registration and ownership of the funds is an important issue. Joint ownership with right of survivorship has much to recommend it. But unless you establish a trust, there is no ironclad way to prevent your grandchildren from getting their hands on this money prematurely if they are joint owners. Once they reach adulthood, they have the right to do whatever they like with the money.

One very simple way to keep control of this for as long as possible is to register each account in your own names as joint owners with right of survivorship. Then in your wills, identify each account specifically for one grandchild. An attorney can tell you how to write it, but your intent will be something like: "If my spouse survives me, I leave my account # 123456 in (name of the fund) to my spouse. If my spouse does not survive me, I leave that account to my granddaughter Sarah."

You can take the gift one step farther, and make sure it will be remembered, if you and your spouse write a joint letter to each grandchild, to be delivered along with the account after you are gone, saying why you set up this account and what you hope your grandchild will be able to do with it.

I think your grandchildren are lucky to have you for grandparents, and I hope you find many ways to enjoy their company and impart your generosity and your long-term outlook to them.