UGMA / UTMA to 529 Plan Strategy - Legal? Make Sense?

No, it's not true. UGMA/UTMA assets are a completed gift and belong IRREVOCABLY to the minor.

Irrelevant, since the transaction is not legal.

Ditto.

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 snipped-for-privacy@rlcarr.com

not really "like a UTMA" - but *still* a UTMA. The owner of he

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:

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.

Scott, As others have posted, the funding of an UGMA/UTMA account is a completed gift so those are your kid's assets, and can be used only for the child's benefit (how that's defined is a question of state law, where you live, but making a gift to a grandparent is well out of that mandate in every state so just put that idea aside).

At this point you have a tax-triage kind of question. You're correct that some new tax rules are kicking in for UGMA/UTMA accounts, so before even going into alternatives...what are the unrealized capital gains, as of today? Something to keep in mind is that 529 plans accept CASH so you'll need to liquidate the current investments and fund an UGMA/UTMA

So - what is the cost basis of your kid's investments, and current value

-- i.e. what are the unrealized gains, as of today?

-Tad

According to Fairmark

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 to everyone who responded to my questions!

"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?

snipped-for-privacy@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 snipped-for-privacy@gmail.com

Because the kid is a minor.

Well, legal and ethical aren't the same thing. While it may be legal, I personally would consider it improper (but that's just me)

-- Rich Carreiro snipped-for-privacy@rlcarr.com

Precisely. Once the kid is no longer a minor he or she could give things away. As the custodian, you cannot justify "giving away assets" as in the interest or for the benefit of the minor. Just saying "it's in her best interest" doesn't legally make it so. Similarly, you cannot, say, buy a bigger house and then pay part of that mortgage out of the UTMA account, even though the kid benefits from you having a bigger house.

The standard example, though, of getting money out of a UTMA which might otherwise have been money spent by the parent (therefore, effectively, a UTMA->parent transfer) is paying for summer camp for the kid. You cannot use UTMA money to pay for food, clothing, medical care or shelter. You can use UTMA money to pay for college, to pay for the kid (not the family!) to take a trip to Europe, for after-school classes (music, whatever) - even, potentially, a car.

See, for example,

See the link above for some more explanation. If you are about to spend some UTMA money and aren't *sure* it's okay, check with someone familiar with your particular State's laws.

Pages 5-8 of the fairmark link privded above go on to explain ways of dealing with "UTMA regret" as he calls it.

As Beliavsky correctly indicated, you can always withdraw the UTMA money to spend on "support of the child" (therefore it benefits the child) and put the money you would have spent out of pocket in a 529 instead.

Legally, you are probably okay to do so (I am not a lawyer), but there are numerous ethical arguments against this tactic. Some argue that a UTMA is non-specific, while a 529 is education specific. If the child doesn't go to college, withdrawing the funds would result in a penalty that wouldn't have occurred with a UTMA. This is decidely not in the "best interest" of the child, even though alot of parents like that idea. IOW, the beneficiary of a UTMA decides the fate of the account, the beneficiary of a 529 plan has his fate decided for him (barring taxation and penalties).

I'm personally on the fence about this one. From a ethical (poor diction?) standpoint, your original intentions for the funds became irrelevant the moment you gifted the money. Therefore, a transfer to a

If the information at

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.

It says the expenditure is proper without regard to a duty to support the minor. In other words, even if someone (including the custodian) has a duty to support the minor, the custodian can go ahead an make the expenditure, provided that it's for the benefit of the child. You can read in many places on the Internet and elsewhere that a custodial account cannot be used to pay for items that are within the parent's support obligation, but the language quoted above from the Uniform Act makes it clear that those statements are not literally correct."

It's a little fuzzy, but apparently, you're right. It seems that it's not "you cannot use the money" but, rather, "you cannot use the money for those things without potential tax consequences". The bottom line is that it's pretty messy if you try to follow it to the letter.

Were I the original poster, and assuming he doesn't have huge cap-gains embedded in the UTMA account, I'd put the UTMA into a UTMA-529 and be done.

Yech to the entirety of UTMA/UGMAs and their lack of clarity!

Thanks for picking up my error.

In the second of Fairmark's three-part "UTMA Regret" series, they do suggest the "kid gives a gift back to parent" strategy and they give it a resounding "it depends". Interesting reading, to say the least. (just before the "Return Gift" strategy, they suggest, daringly, the "just take it" strategy... Interesting.)

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Indeed. Say $160k at a private college for four years is one huge chunk of dough over four years for by far most of America.

You are not insane; the increases in tuition are. The latest leger-de-main (sp.) by college administrators is to tack on all sort of fees. A Sept. 4 NY Times article reports, for example, that the U. of Oregon tacks on fees that add an additional 40% to the cost of tuition. Also, student health care offered is nothing like that of, say, twenty year ago. The kids (or the kids' parents) are paying significantly more.

The approach you propose is treated well at the Fairmark site

Given what you say, it seems to me what the right thing to do here is for no one to judge, barring those who foolishly want to try to split hairs and are perhaps clueless about the cost of a bachelors' these days.

People may make gifts to minors simply to stay within gift tax exclusion limits. For example, suppose Grandpa (single) wants to give $50,000 to his daughter and son-in-law, but he actually gives $12,000 to each of them, and $10,000 to each of their two twin sons and $6,000 to their daughter (youngest of the three), all minor children (his grandchildren). He did this because he read something on this newsgroup that seemed to indicate it was a good idea. (Of course, unless his estate was especially large, simply filing a IRS Form 709 for the year of the gift would avoid problems).

Would the ethics issue still come into play?

The real "news" item that I take out of all of this, is that while UTMA college funds were once an OK strategy, they have been all but obsoleted by two things: QTP (qualified tuition plans) or other tax-advantaged education savings accounts, and the recent raising of "kiddie tax" age limits.

The folks caught in the middle of this change are going to look for creative solutions, no doubt.

-Mark Bole

I apologize for changing the subject a bit. How is that insane when thousands of students continue to apply to limited number of seats available in the best universities? Tuition at public universities does not cover, by a long shot, the true cost of attendance. A significant portion of that is covered by taxes. And in the instance of private universities, covered by endowment.

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