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, investments are the gift that keeps on giving.

If you're thinking of giving somebody shares of a mutual fund you won't get a free swimsuit issue, but you might wind up with some nice tax breaks.

The tax advantages of giving shares of mutual funds have made them popular gifts, especially for children. And many mutual fund companies encourage such giving by lowering their initial investment requirements for accounts opened as gifts.

T. Rowe Price

, for example, normally requires a $2,500 minimum to open a mutual fund account, but reduces that to $1,000 for a gift account.

Other funds have minimum investments as low as $50, but they often require the person who set up the account to make additional monthly or quarterly investments.

TIAA-CREF

requires a minimum of $250, but does not require subsequent investments, though they're encouraged.

A popular way to invest for children is to open a custodial account under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), which allow an adult to invest on behalf of a minor.

If you're planning to put away money for your child, setting up a fund in the child's name offers some tax advantages. Dividends and capital gains generated by mutual funds, if held in an adult's account, are taxed at ordinary rates -- as high as 39.6% -- or at the 20% long-term capital gains rate. But the first $700 in income earned by a child under 14 is tax-free, and the next $700 is taxed at the child's rate, usually 15%.

Earned income over $1,400 is taxed at the parent's rate, which can range from 15% to 39.6%. But once the child turns 14, all earned income is taxed at the child's rate, which can be as low as 15%.

A gift to a child or loved one is also a way to reduce the size of your taxable estate. Individuals can make tax-free gifts of up to $10,000 a year to an unlimited number of recipients. You and your spouse together can give up to $20,000 a year per child or grandchild (though the recipient doesn't have to be related). Once that money is given away, it is out of your estate and does not count toward the $675,000 in assets that are excluded from estate taxes. (That lifetime estate-tax exclusion will increase to $1 million by 2006.)

Planners note that a potential disadvantage of these accounts is that once the child reaches the age at which he or she can take control of the account assets, usually 18 or 21 depending on the state, the child has total control over what to do with them. So if Junior wants to go out and blow the fund on a wild week in Vegas, there's nothing you can do about it.

Parents or grandparents who are concerned their little darling might end up going the way of some former cast members of

Different Strokes may want to consider setting up a trust fund instead, says Donna Barwick, a certified financial planner with the

Arden Group

in Atlanta. That way, the custodian can stipulate exactly what the child can do with the money, as well as how much will be received and when he or she will receive it.

"I always advocate that people create their own trust, unless estate tax is not an issue or you're not worried about your child's temperament," says Barwick.

Setting up a trust is probably more an option for wealthier investors, because it requires a lawyer to set it up and can be expensive, notes Dee Lee, author of

Let's Talk Money: Your Complete Personal Finance Guide. Barwick says the cost of setting up a trust fund can range from $500 to $5,000, depending on its complexity.

Another drawback of UGMA and UTMA funds is that once the assets become the child's property at age 18 or 21, that money is taken into consideration by colleges when determining eligibility for financial aid. That can be problematic because financial aid formulas normally require students to contribute 35% of their total assets to their college costs per year. Parents are expected to contribute much less, usually around 5% to 6% of their assets.

A more tax-friendly way to help put a relative through school is just to pay the tuition directly to the institution. Funds paid directly to an institution for educational or medical expenses are exempt from the $10,000 annual tax-free gift limit, so this is another way of getting money out of your taxable estate.

Planners also suggest that grandparents who set up a UGMA or UTMA account name another trusted person, such as the child's parent, as the fund's custodian, because if the grandparent dies the fund is technically part of his or her estate and could be subject to estate taxes.

For investors who have made a hefty sum on the stock market this year and are considering giving away some stock as a present, planners caution that you could also be bestowing the unwelcome gift of built-in capital gains taxes upon the recipient. Your cost basis is part of the gift, so if the recipient sells the shares, that person will owe taxes on your gains as well as his or her own.

Perhaps most importantly, before you decide to give any money away at all, Lee says to make sure it's not money you're going to need to get you through your golden years.

"My biggest concern is: Don't give anything away you think you're going to need, because you can always give it away in your will," says Lee. "If you need it for your nursing care, you're better off knitting them a sweater."

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