<p>Does anybody know where to find information on the legality (or illegality) of transferring money out of a student's name into the parent's name? I'm not provoking a big philosophical argument on the topic - I simply want to know what the official policy for FAFSA is, and where that is documented. THANKS!</p>
<p>is it an UGTM account then it is illegal
If it is a taxable account then I don't think there would be a problem</p>
<p>hmm ... I believe any transfer over $10K needs to be reported as a gift and I believe taxes are due on gifts over $10K .. that said a student could give $10K each to Mom, Dad, little sis, little brother, grandma, grandpa, etc ... the money also (legally) is the money of the person to whom you transfer the money. The other possible catch (and I haven't gone this far with my kids yet so I'm just thinking out loud) would be if the schools ask for last year's and this year's info ... which would make the transfers very transparent (unless you do them well in advance of the kids going to school).</p>
<p>
[quote]
It is not possible to transfer money back to the parent from a child's custodial account because the original transfer was an irrevocable gift. Once the money has been given to the child, it is owned by the child. The child does not have the authority to gift the money back to the parent, and the custodian would be violating his or her fiduciary responsibility if he or she transferred the money back into his or her own name or used it for his or her own personal benefit. (If a custodian does this, or otherwise behaves in a fashion that the IRS interprets as indicating that no gift was actually ever made, the custodian would owe back taxes at his or her rate, plus penalties. Also, the child could sue to recover the funds.)</p>
<p>However, nothing prevents the custodian from spending the money for the benefit of the child, so long as the expenses aren't "parental obligations" or otherwise benefit the custodian. Parental obgligations are expenses a parent is normally expected to provide for his or her child, such as food, clothing, and shelter. But if your child wants a computer or to go to summer camp, it is usually acceptable to spend the child's money on those expenses. The parent can then set aside some of his or her own money in a college savings account owned by the parent. Obviously, this only works if there are non-parental obligation expenses that the parent would otherwise have provided for his or her children. Attempts to undo an UGMA transfer in this fashion should only be done in consultation with a qualified accountant.
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<p>much depends on what type of account the money is in.
<a href="http://www.finaid.org/savings/ugma.phtml%5B/url%5D">http://www.finaid.org/savings/ugma.phtml</a></p>
<p>Sigh. I know you did not want any philosophical comments, but how can I resist? Apparently, when there is money available to pay for school, people want to hide it so they can get more money from other people: i.e., taxpayers through subsidized loans, or alumni through endowment funds for financial aid grants. When I give money to my alma mater for scholarships, it is for people who really need the money.</p>
<p>Sorry. This may be perfectly legal, but it is unethical. I also think it is unethical to "spend it down" (neighbors did this - vacations, cars, etc.).</p>
<p>I guess I am alone on this one. If someone in American can get something for nothing, he or she will.</p>
<p>voronwe-
I've heard about the spend down approach. I remember being counseled to blow my home equity. </p>
<p>My D has a trust fund that was left to her by a deceased relative. I think it's supposed to be in my name, but I have yet to file for the transfer out of the name of the deceased person....which I'm told I have to do in Orphan's Court. I haven't claimed this as an asset on any fin aid forms, as I don't think it matters right now. But, I'm curious about how it would have impacted me for son's fin aid had I been awarded guardianship of my D's trust before now.</p>
<p>Voronwe, No, I agree with you totally. My children's great-grandmother left them a small inheritance in a trust for "college expenses" when she died (they were 1 and 3 at the time). Through careful management, the money has grown -not quite enough to pay for the full cost of their college educations, but enough that we will not be eligible for any sort of financial aid (even though we might qualify otherwise). I don't have a problem with this - and wouldn't think of trying to "hide" the trust somehow. It just is and I am grateful that the money is there so that someone else who doesn't have access to such a wonderful gift can hopefully receive help to go to college as well.</p>
<p>voronwe
We give money earmarked to D high school for scholarships and to her college for use as they see fit, but ever since Bill gates kids started attending her grade school, I can't bring myself to mail them a check. It isn't like they are doing anything radical with it, but it is much shmancier than it ever was when she attended. Too schmancy if you ask me. ( do little children really need micropipettors?)
We also refinanced our house which naturally brought down equity as we took money out, but it was money to get the roof and furnace replaced not to get a DeLorean .
I do know people who have refinanced their house just to do extensive remodeling, although why people want to add space when the kids will be out in a couple years is beyond me, but I only have a tiny bit of trouble with that. It is hard to reconcile folks who are getting lots of need based aid, while you are sitting on their 9 ft leather couch peering through their skylight.</p>
<p>I don't think it is unethical at all. What is unethical is to treat parents who save and save all their lives like second class citizens and provide no financial aid to them. Meanwhile, spendthrift families can get all the aid that they need. There is something wrong with that picture in my opinion!</p>
<p>As far as transfering monies from kids to that of the parents, you can do it. There will be a gift tax return filed if there is a gift of over $11,000 per kid ( as a single parent) . You also get a lifetime exemption from gift tax of $1,000,000, which is above the yearly numbers that I posted above.</p>
<p>Even better would be to transfer all monies in the kid's name and in your name to life insurance products such as a single premium life insurance policy or annuity. Cash value insurance products are not considered assets for the FASFA. One note of warning: get low cost, low commissions policies; otherwide, the costs may overcome the benefit.</p>
<p>But if the amount is not significant and is in the child's name it can significantly hurt their aid wheras the same amt in parents name won't. If you are buying down buy what needs to be bought such as computer for school, clothes for cold weather if you are from a warm state. That way it evens the playing field with other families who just have the same amt of money money in their name. This needs to be done junior year however. I think this is different then hiding money which in that case I agree with Carolyn</p>
<p>taxguy made my point, but I will restate it anyway....</p>
<p>If it is unethical to "spend down" is it also unethical to not save for your kid's college education? </p>
<p>Is it still unethical if you begin the "spend down" process 2 years before college? 5years? 10yrs? </p>
<p>What about money in a 529 plan? I guess we are stuck with those assets, since they can only be used for education.</p>
<p>If the child is 18 or over, in most states he can give the money away freely. That means that if he wants to, for whatever reason, he can give the money to his parents. For FAFSA purposes, this needs to be done on or before the day the FAFSA is submitted, which normally is January-April of senior year, and no earlier than January 1 of senior year.</p>
<p>As far as being "unethical", since when is it only ethical to pay more than everyone else because you did not do your homework and plan ahead? If this were a secret loophole, that might be different, but it is widely known that cash in the child's name is assessed or taxed at the 35% rate, while cash in the parent's name is assessed at a much, much lower rate (5%). Every web site and "how to pay for college" book mentions this. So how is it unethical to do the obvious and expected, which is move the cash to the more advantageous location?</p>
<p>Two wrongs don't make a right is a pretty basic ethical principle!!!</p>
<p>Arguing that because OTHER people don't save for their kids' college educations, therefore it is OK to hide money so that the taxpayers and alumni can pay for your kids too, is - yes - unethical.</p>
<p>you know, some people just don't make enough money to be able to "save" for their kid's educations. but if a kid works and earns money - say the kid starts working when they are 14, and they work till their 18, and say they make 4grand a year - that child could possibly have 16k as money for themself to put towards college or towards whatever else - why should that child get hit to pay 35 percent of it towards school, when if that 16k belonged to the parents, theyd only have to pay 5 percent of it towards school. it's not fair to the child. i say go ahead and put it in the parents accounts and then when the child wants it back, let them have it back. that way they are able to save more of it (spending 5 percent instead of 35)... it makes things better for the child in the long run, in my opinion anyway.</p>
<p>why should a child be denied financial aid if the money is in their name, whereas they would be given more if the money is in their parents name. its the same amount of money.</p>
<p>Let's not confuse the issues with slogans. Where are the "two wrongs" here that don't make a "right" ? If I give my son a gift of $10,000 to help pay for his college and he turns around and gives it back to me and says, "Here Dad, this money can be used much more efficiently if you keep it" has he done something unethical? I really don't think so. If the rules encourage a certain behavior and the law permits it I wouldn't lose sleep worrying that it is unethical.... in this case.</p>
<p>Our son has a UGTM account which was set up with a gift from my mother. By the time he reached college age this year it was valued at about $78,000. Did it affect our EFC? Yes. Did we ever consider hiding it or prematurely spending it down? No!! Our family considered ourselves fortunate to have a sizable college fund available.</p>
<p>Instead, our son decided to apply to colleges where he might be offered merit aid and we agreed that he would be responsible for spending money, tuition, books and academic fees. We would cover room, board and health costs.</p>
<p>He applied to 5 private colleges and one public, receiving merit offers of about $370,000 for four years. He chose to attend RPI where he is receiving $25k/year and will spend down his UGMA account by about $3000 his frosh year assuming no further market gains or losses the remainder of the year. At graduation he should have about $50,000 remaining in the account. Rather a nice way to start post grad life!</p>
<p>He feels good about largely responsible for his college cost and we feel good about helping him out too.</p>
<p>The "two wrongs" specifcially referred to this:</p>
<p>"If it is unethical to 'spend down' is it also unethical to not save for your kid's college education? "</p>
<p>Yes, it is wrong (though not legally) not to save for your child's education as so many of my neighbors do not - spending the money on fancy cars, vacations, etc. and <strong>then to ask other people to pay for your child to go to college.</strong>*</p>
<p>That's one "wrong." The other is <strong>to have money saved for college, but try to find - after the fact - ways to hide it so that you can ask other people to pay for your child to go to college.</strong></p>
<p>I volunteer with students who have nothing, and I mean no-thing, due to being refugees who saw their parents brutally murdered, or due to devastating disasters. THEY deserve "other people's money," not people who HAVE money and are just trying to hide it, OR people who had it but spent it partying!</p>
<p>I really do not see how I could possibly make the difference any clearer. As for that hypothetical $10,000, why not use the entire amount for college instead of trying to see if you can use only 5% rather than 35%? Then maybe my alumni dollars and tax dollars could go to SOMEONE WHO REALLY NEEDS IT.</p>
<p>The difference between your post and Originaloog's wonderful post right above this one says it all..I mean, jeesh---- you even wondered about the 529 plan! Why, were you hoping you could hide that too?!!!</p>
<p>Agreed, voronwe. I also see a lot of people who make little attempt to save for their children's education and who then expect to get large sums of financial aid. Many people do not make this saving a priority, nor do they see anything wrong with that. Often I get the impression that they believe this financial aid money simply appears from thin air, and that they don't think about it as money which is coming from tax-payers or alumni donors. Even worse to me, though, are those who make no attempt to save and also make the decision that they will contribute nothing towards their children's education. Refusing to file FAFSA, refusing to be of any assistance in their children obtaining loans, etc. The b/f of one of my D's is in this situation, as is the child of a distant relative, and our family is supporting them financially because those who SHOULD be, aren't. Fortunately, my H and I are in a position to do this but it makes me sad to hear of the multitude of kids out there who have no one to help them.</p>
<p>Does the status of a parent's savings, investments and home equity make that much of a difference in the EFC? I mean, you can only hide or fudge so much....you earn what you earn and it's hard to hide income. Someone with a decent income still won't get that much aid, even if they play with their savings, right? Are we talking moreso about people with income levels that would warrant aid, but savings that would offset the need? How many people with lower incomes have that much in savings?</p>
<p>Momsdream, sadly, if someone is self-employed, the number of tricks that can be played are legion. I once worked for a small company where the owner actually had his dog on the payroll-- the salary was a business expense, and the owner's wife cashed the paychecks for her "fun" money. There are people with small businesses who are in a position to shelter all sorts of income, declare living expenses as deductions, etc.</p>
<p>Net-- if someone wants to game the system they will.</p>