Convert UTMA to 529

Sorry... I need to complicate this a little bit.

The UTMA needs to be liquidated very, very soon. My options are to have it converted to a 529 (discussed above) for the minor or have the minor give it back to me to cover college expenses I've been paying. I assume that as custodian I can do that, but correct me if I'm wrong.

I'm not really looking for college financing advice here, but I will note that there is a financing advantage if the money is in my coffers right now as opposed to in the student's name. So the "distribute back to me for college use" option has some advantages. However, I'm concerned about the tax impact.

Questions:

If the UTMA is converted to a 529 all in the student's name, who is assigned and pays the capital gain tax? The UTMA beneficiary/student?

Is there any TAX advantage to the UTMA -> 529 conversion other than the funds picking up new tax deferred status in the 529? In other words, is there any difference between doing this conversion and just setting up a new 529 fresh? Is any of the previous UTMA gain tax advantaged?

If the UTMA is distributed/gifted back to me to cover previously paid and new college expenses, who pays the capital gain tax?

Is it within the rules of a UTMA for me to distribute it in the way I choose as long as the minor's interests are truly being addressed?

Does the gift tax kick in if it's distributed back to me to cover expenses, or is that not a gift... just a distribution on behalf od he minor? Would the IRS frown on it being done to reimburse me for expenses in previous years or again, is it legit as it's in the minor's interest?

Thanks as always,

Depending on how the UTMA is set up, the beneficiary is supposed to take control somewhere between the ages of 18 and 25. Once the applicable age is reached, you lose control and he takes over.

I don't know why there would be a financing advantage, but if you transfer it back to yourself, your child might be required to file a gift tax return on that amount. It might be better if you were to borrow it, at reasonable interest.

As soon as the UTMA is set up, any interest/income etc., should be reported on the taxes of the UTMA beneficiary. That doesn't change.

As far as I am aware there is no tax deferral for a UTMA trust. It's just that the income is transferred from you to the beneficiary.

I am not aware of any other benefits to the creation of a 529 plan under the circumstances, but others here know more than I do about that point.

If there is a capital gain from the sale of an asset in the UTMA, the beneficiary recognizes that on his income tax.

As long as the beneficiary is allowed to take full control when he reaches the proper age.

If he owed it to you it could be the repayment of a loan rather than a gift. In that case you will probably have to recognize imputed interest on your taxes.

In part it will depend on what the documents that create the UTMA trust say. Read them.

The UTMA has to be converted to a UTMA flavored 529.

Since a 529 has the ability to be transferred to others, you can't take a UTMA which is a custodial account for one individual's benefit, and put it into the standard 529 whose ownership is less than complete.

Just a warning (this is an old thread and it may have already been discussed) - deposits to the 529 have to be made in cash, no transfer of assets. In fact, the 529 has limited investment options, which may not be to your liking. When you liquidate the UTMA, all gains are recognized at once, which may not be an issue, but something to consider.

Ok gents... thanks so far... I think I'm narrowing in here to the final questions.

If the UTMA account goes to "maturity" and is converted to a brokerage account for the child without selling the securities (assuming that's legal... broker says it's OK), will the child accrue automatic Capital Gains in the year she takes posession based on the original basis vs. the current FMV - or are those deferred until she actually sells some shares and has a gain/loss at some point in the future?

The contents of a UTMA aren't affected by the minor when she becomes a major. The cost basis remains the same, and assets are taxed as they were, i.e. interest and dividends should flow to her, as well as long or short term gains. I doubt the account number will even change, it's just that she has legal access to the account. I believe the guardian removal isn't automatic, you should ask the broker how they handle this, and discuss with your daughter.