custodial 529

Paying for College
1

<p>I am a noncustodial parent with a child student going through the college application process. She has an UTMA for which I serve as the custodian. I am planning on funding a "custodial 529" with this UTMA to improve our EFC before filling out the FAFSA form in January. My understanding is that this will cause the assets to be hit at the reduced 5.6% parental rates instead of the 20% student rate. Three questions:</p>

<p>Does it make a difference in the federal EFC calculation whether the custodial parent or noncustodial parent are the custodian of the custodial 529?</p>

<p>A number of the schools my student is applying to are private. While they may all have different policies, generally how do the privates treat custodial 529s? Will this asset shift be of any value to reducing the EFC in the institutional methodology?</p>

<p>Are there any drawbacks to this shift other than the distributions must now meet 529 rules?</p>

<p>Thanks in advance</p>

2

<p>Transferring funds from a UTMA to a custodial 529 will result in favorable treatment of these funds by FAFSA. It doesn’t matter who the custodian is as the owner is still the student, and the funds must be reported as a “student” asset (although assessed at the parent rate of 5.6%, like all 529s).</p>

<p>For Profile schools, UTMAs and custodial 529s are reportable. How each school uses the value is up to the school, but if it follows the FAFSA formula then the 529s are treated more favorably.</p>

<p>One drawback is that if there are significant gains in the UTMA, they must be realized and will be taxed when the account is liquidated. Some of the cash in the UTMA can be set aside to pay taxes, if you want. Also you should be careful not to overfund the 529 in case not all of the funds can be used for qualified higher education expenses.</p>

3

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<p>Well, that’s true so long as the custodian is one of the parents.</p>

<p>And the 529 is always treated as a parent asset, regardless of whether you’re dealing with a public or a private school…</p>

4

<p>There’s a subtle difference between a student-owned 529 and an adult-owned 529. All student-owned 529s are either owned directly by the student (if he or she is over 18/21, depending on the state), or they are in custodial 529s accounts, also known as UTMA/529s, if the student is a minor. The custodial accounts have a named custodian until the student reaches the age of majority. The owner (the student) is the beneficiary and cannot be changed.</p>

<p>Custodial (UTMA) 529s are owned by the student and must be reported regardless of who the custodian is. Note that the word “custodian” here does not refer to who the custodial parent is; it refers to the adult who is responsible for the 529 until the student reaches the age of majority, since minors cannot hold financial instruments directly. The custodian of the account could be the parent, non-custodial parent or grandparent, for example.</p>

<p>All adult-owned 529s, which is the most common way to hold title, are owned by someone else with the student named as beneficiary. This type of 529 allows for the change of designated beneficiary. Examples of this kind of 529 in include parent-owned 529s, non-custodial parent-owned 529s, and grandparent-owned 529s. Only 529s owned by the student’s custodial parent must be reported on FAFSA. 529s owned by a third party for the benefit of the student are not reported. Examples of a third party would be grandparents, non-custodial parents, aunts, uncles, etc. If the OP had asked about a 529 that he owned for the benefit of his daughter, then it would not be reported on FAFSA.</p>

<p>These third-party 529s, by the way, are what trip up parents who (correctly) don’t report them as assets on FAFSA and then are faced with having to report any distribution of funds as student non-tax income.</p>

<p>As I said above, it doesn’t matter who the custodian of a UTMA/529 is, all student-owned 529s must be reported on FAFSA and are assessed at the parent rate of 5.6%.</p>

<p>On Profile, all 529s with the student as beneficiary must be reported, so the distinction between student- and parent/grandparent-owned 529s isn’t as critical. The result is often that more 529 money shows up as an asset on Profile than on FAFSA when grandparents or others have funded 529s for the benefit of the student.</p>

5

<p>I agree a custodial parent non-529 UTMA is 20% for FAFSA, so transferring it to a 529 is beneficial, depending on realized gains. But what about a grandparent custodial UTMA that is not a 529?</p>

6

<p>Grandparent-owned UTMAs are student-owned accounts (whose SSN is on the account? it’s the student’s). These are reportable on FAFSA as student assets and assessed at the student rate of 20%. Grandparents have the option of converting these accounts to UTMA/529s.</p>