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Posted by on October 25, 2007, 1:09 pm
I've got a nice chunk of change invested in UGMA / UTMA accounts for
my kid's college (4 years away). I am the custodian and I understand
that the assets technically and legally belong to her. But there are
two reasons why I'm looking into selling the assets and re-investing
them in a 529 plan.
First, in 2008 the kiddie tax age rises from 14 to 18 (or 24 if still
a student). Second, financial aid eligibility takes into
consideration a significant percentage of the student's assets but a
much smaller percentage of the parents' assets.
Because of the kiddie tax change, there's no longer a tax advantage in
keeping stuff in the kid's name (other than the initial $1,700
exemption). And because college costs are rising at about twice the
inflation rate (but my salary, unfortunately, is not!), I need to get
the kid "as eligible as possible" for financial aid.
A 529 plan seems to be a good way to go. As I understand them,
earnings on the assets are tax-deferred and withdrawals are tax-free
if used for secondary education purposes. In addition, it seems that
a grandparent can open a 529 account with the grandchild as
beneficiary. Getting the assets into the grandparents' name removes
them from financial aid calculations, which only look at the student's
and parents' assets and income.
So, a few questions, with the premise that I'm only going to do
something if it's 100% legal, since I'd prefer to worry about other
things besides the IRS coming after me...
1) Is it true that, as UGMA / UTMA custodian, I am allowed to sell
those assets and reinvest them elsewhere, transferring ownership to
myself or the grandparents, as long as it's in the best interest of
the child?
2) Would such a transfer be considered a "gift", subject to gift tax
rules?
3) If so, how do the gift tax rules work? What are the limits?
What's the best (and legal!) way to get money from one person to
another?
4) What part of any initial transfers and/or ultimate 529 plan
withdrawals are IRS reportable?
5) Am I completely insane for thinking I can simply move all the kid's
assets to the grandparents? Is this one of those "seems so obvious
that it can't be legal" things?
Thanks in advance for any advice!
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Posted by Rich Carreiro on October 25, 2007, 2:19 pm
scott.d.brenner@gmail.com writes:
> 1) Is it true that, as UGMA / UTMA custodian, I am allowed to sell
> those assets and reinvest them elsewhere, transferring ownership to
> myself or the grandparents, as long as it's in the best interest of
> the child?
No, it's not true. UGMA/UTMA assets are a completed gift and
belong IRREVOCABLY to the minor.
> 2) Would such a transfer be considered a "gift", subject to gift tax
> rules?
Irrelevant, since the transaction is not legal.
> 3) If so, how do the gift tax rules work? What are the limits?
> What's the best (and legal!) way to get money from one person to
> another?
Ditto.
> 5) Am I completely insane for thinking I can simply move all the kid's
> assets to the grandparents? Is this one of those "seems so obvious
> that it can't be legal" things?
Yes, you are and yes, it is.
However, what you can do is open a UTMA-ized 529 plan -- i.e. a 529
which is under an UTMA umbrella, then transfer the UTMA assets to the
UTMA-529. Like an UTMA, the assets belong solely and irrevocably to
the child -- the beneficiary of the UTMA-529 is the child and cannot
be changed to anyone else (until the child reaches the age of majority
and can personally take control of the UTMA-529, at which point it
turns into a normal 529 and the now-adult child can change
beneficiaries if he so chooses). Like a 529, it gets the usual 529
tax breaks.
--
Rich Carreiro rlc-news@rlcarr.com
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Posted by on October 25, 2007, 4:52 pm
> However, what you can do is open a UTMA-ized 529 plan -- i.e. a 529
> which is under an UTMA umbrella, then transfer the UTMA assets to the
> UTMA-529. Like an UTMA, the assets belong solely and irrevocably to
not really "like a UTMA" - but *still* a UTMA. The owner of he
529 plan account is the UTMA. The beneficiary is still the child.
Due to a (recent) change in law, UTMA assets held in a 529 are
not considered "student-owned assets" in the FAFSA calculations.
Financial-aid wise, there's not much difference now between
UTMA-529 money and parent-owned 529 money. Before that change
in law, the UTMA assets were considered student owned assets and
a much much larger proportion of them was assumed to be available
to pay for college (resulting in less aid).
This seems to be a nice summary of the situation:
http://www.savingforcollege.com/top-tip/top-tip.php?top_tip_id=4
Before that change there was still an advantage to moving UTMA
assets into a 529 - fully tax-deferred and/or tax-free growth -
and those benefits might still make it worthwhile even for
folks who don't expect any financial aid at all.
> the child -- the beneficiary of the UTMA-529 is the child and cannot
> be changed to anyone else (until the child reaches the age of majority
> and can personally take control of the UTMA-529, at which point it
> turns into a normal 529 and the now-adult child can change
> beneficiaries if he so chooses). Like a 529, it gets the usual 529
But it's up to that now-adult child - like other UTMA assets, the
parent who put the money in there has no more legal say. It is
now fully property of the former child.
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting
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Posted by Beliavsky on October 26, 2007, 9:19 am
> scott.d.bren...@gmail.com writes:
> > 1) Is it true that, as UGMA / UTMA custodian, I am allowed to sell
> > those assets and reinvest them elsewhere, transferring ownership to
> > myself or the grandparents, as long as it's in the best interest of
> > the child?
>
> No, it's not true. UGMA/UTMA assets are a completed gift and
> belong IRREVOCABLY to the minor.
According to Fairmark
http://www.fairmark.com/custacct/spend.htm ,
"A custodian may deliver or pay to the minor or expend for the minor's
benefit so much of the custodial property as the custodian considers
advisable for the use and benefit of the minor, without court order
and without regard to (i) the duty or ability of the custodian
personally or of any other person to support the minor, or (ii) any
other income or property of the minor which may be applicable or
available for that purpose."
I think the custodian can sell the assets and spend them on the normal
expenses of raising a child, keeping proper records. If that money
replaced what the parent would ordinarily spend on the child from
other sources, that is economically equivalent to what the OP is
trying to do.
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Posted by on October 26, 2007, 1:04 pm
Thanks to everyone who responded to my questions!
In response to my question about transferring the assets of the UGMA
to the kid's grandparents, Rich Carreiro said...
"UGMA/UTMA assets are a completed gift and belong IRREVOCABLY to
the minor."
OK, but I have assets that belong to *me* yet I'm allowed to gift part
of them to someone else. So why can't the kid likewise gift some of
her assets? Or is the situatino different because she's a minor? If
that's the case, and hence the reason for a custodian (me), then I
should still be able to do the transfer if it's in her best interest,
no?
BreadWithS...@fractious.net gave me some info I'm happy with:
"Due to a (recent) change in law, UTMA assets held in a 529 are
not considered "student-owned assets" in the FAFSA calculations.
Financial-aid wise, there's not much difference now between UTMA-529
money and parent-owned 529 money."
This solves the problem of reducing my kid's assets to make her more
eligible for financial aid. Of course, as Tad pointed out, I have to
first liquidate the UGMA/UTMA assets so I can fund the 529 with cash,
as required. And I do understand that means realizing capital gains.
But I recall that the maximum cap gains tax rate for kids 14 and under
goes UP starting with tax year 2008 (can anyone confirm?), so even
though I'll take a hit, I'd rather do it in 2007 than in 2008.
Beliavsky provided a strategy that sounds good, if I can confirm that
it's legal:
"I think the custodian can sell the assets and spend them on the
normal expenses of raising a child, keeping proper records. If that
money replaced what the parent would ordinarily spend on the child
from other sources, that is economically equivalent to what the OP is
trying to do."
Thanks again for everyone's insight!
Scott
scott.d.brenner@gmail.com
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