How closely do colleges scrutinize pre-college spend-down of UTMA?

Hi, my daughter will be HS senior autumn 2017 and we will be filing FAFSA and CSS for the first time. I made the mistake of putting $10k into an UTMA for her when she was little, not understanding the effect on financial aid. At the beginning of 2017, the UTMA had increased in value to $32K with $11K in unrealized capital gains. It was never intended to be college savings. We also have parent-owned 529s for college.

What I’ve been doing is spending the UTMA down this year on purchases for her benefit, before we file FAFSA this autumn. Any amount that remains, I think I’m going to transfer to a student-owned 529 before filing FAFSA, but I’m trying to spend it all down if possible. I bought her 2 cars (first one engine went out), driver’s ed course, car insurance, trip to Disney, two summer educational programs, new clarinet, new computer, and a bunch of other smaller things. Plus I live in Ohio, and the Ohio UTMA statute explicitly states that an UTMA custodian CAN spend UTMA assets on support obligations such as food and housing.

I have been trying to keep receipts of everything, and currently have a huge envelope of disorganized receipts. I don’t have any written ledger yet, and I know that I don’t have every single receipt. I transfer money from the UTMA directly to my main checking account and then spend it on daughter from there. I know that co-mingling UTMA assets and my personal assets like this is questionable, but a custodian is allowed to do this as long as the UTMA assets do in fact get spent on daughter.
But for some things I bought for her, the paper trail is pretty hard to follow. For example, both cars were titled in my name, because she is 17yo and I’m paying the car insurance. Another example, I have a receipt that shows I bought a computer, but no documentary proof that I gave it to her.

I couldn’t be less worried that my daughter or anyone else in the family will bring a civil suit against me for breach of fiduciary duty due to my disorganized and less than perfect accounting of the UTMA assets. Also, I don’t think the IRS gives a hoot either, since I’m in higher tax bracket than daughter so there are no tax-evasion red flags.

What I am worried about is that a college will dig into the FAFSA or CSS figures and I’ll be flagged for full audit. If that happens, will they just take my word for it that the UTMA was spent down for daughter’s benefit? Will they want to see receipts or transaction-level detail? Has anyone experienced this before? I know a college can ask for any information they want, but has anyone here actually ever had a college dig into withdrawals from an UTMA before?

Thanks!

The schools won’t ‘dig into’ the FAFSA filing. They either accept it or ask for verification. If you don’t list the account as an asset, it is unlikely a school will ever know it existed. If you spend the account down, you won’t be reporting it on CSS either. The forms do not ask “where did that car come from? how did you get a computer?”

If you report no income and no assets, they may ask how you are living, who is paying those expenses.

I’m curious. Why didn’t you use that $32,000 to help,pay for college? Most colleges do not meet full need…so it’s very possible that $8000 a year would have been very useful in terms of helping with college costs. Putting it into a 529 would have meant itmwas counted as a parent asset at 5.6% of value per FAFSA.

Thanks for taking the time to reply. Because of the UTMA, daughter’s tax return will show $11K of dividends and cap gains. But because I am spending it down, she will have nearly nothings to report for student-owned assets. Isn’t that a red flag for fraud? I’m expecting to get flagged for full audit and wondering if college will question whether transfer of money out of UTMA was fraudulent.

–> If you report no income and no assets, they may ask how you are living, who is paying

I will definitely be reporting my income (~$70K) and substantial assets. Daughter will report her wage income plus dividends and interest and $11K of capital gains. I want her to go to in-state college on merit scholarship where financial aid wouldn’t be available, but she is interested in top tier schools like U of Chicago where she would have “need”.

Hi thumper1. Thanks for replying to both of my questions.

The reason I didn’t put the UTMA into a 529 is because ex-husband and I both already have 529s for her that are enough to cover 4 years at an in-state public university. We also have the same amount in 529s for her brother, but he is quite sick and not likely to ever go to college and we’re looking at eventually having to pay the 10% penalty and income tax to get his money out of his 529 to use it for non-educational purposes for his benefit. I’m not very happy about that! So we already have MORE than what we think we will need in 529s.

People spend their assets all,the time. Just be honest about it all.

University of Chicago meets full need but your other colleges probably don’t…and that UTMA money might have come in handy to help,pay those costs. But it’s too late for that now…at least for the portion you have spent.

And like I said…putting it into a 529 would mean it’s reported as a parent asset…so 100% would not be used for each year for financial aid calculation purposes.

But I guess your choice was to spend the money.

I wonder how the ex spouse felt about spendind down the $32k in UTMA savings.

Reply to Madison85:

There were actually 2 UTMA’s: one held by me with $16k and one held by daugher’s dad with $16k. I referred to only one UTMA in my post just for simplicity. Daughter’s dad and I are on very close terms (we have keys to each other’s houses and talk on phone almost daily and I still do his taxes and he not only asks my advice on investments, but actually takes it.) We made the decision together to spend down the two UTMA’s, because neither one of us wants her financial aid to be reduced by $8k per year due to the UTMA’s. The original plan for the UTMAs was for non-college assistance that the 529s wouldn’t cover, such as for a car and a wedding someday. The revised plan is that we are saving for car/wedding/etc now in our own names instead of UTMA’s, now that we understand the impact of UTMA’s on financial aid. He sees all of my account statements and I see all of his, and I have confidence that we will continue to work together when it comes to helping our young adult kids.

I know this sounds idealistic, but we were BOTH completely honorable and generous toward each other during the marriage concerning finances, and why would we stop now? I understand that this isn’t always possible, and it requires good behavior by both people, but I don’t think it is rare for divorced parents to work together for the benefit of the kids.

If you can save this amount of money, do you even qualify for need based aid?

If your daughter had a W-2 for 2016 you could have maxed out her Roth IRA contribution but it’s too late for that now. Consider it for 2017 earnings before filing FAFSA.

It’s possible that spending down the $32k UTMA will result only in not having $32k available to pay for college with no difference in aid than if you hadn’t spent the money.

OP- you don’t need our advice so I won’t direct my comments to you.

To anyone else reading this-- Blossom’s rule- do not do ANYTHING for the sake of financial aid which does not make sense in the context of your overall financial, tax, and estate planning. If you are planning to pay for a trip to Disney, then money is fungible- and other than putting it on a credit card or taking out a Heloc or borrowing from your IRA-- it doesn’t matter how you pay for it. But paying for a trip to Disney which you would not have done JUST to spend down an account- regardless of how it is titled or who owns it-- for the sake of a “maybe” increase in financial aid… not a good idea.

OP- you are banking on your D’s college financial needs being met exclusively with your savings and financial aid and I hope you are right. If not, that trip and the other “stuff” is going to feel pretty burdensome. At a minimum, the money would be the difference between your D having to work during the semester and summers vs. being able to do a cool internship, academic research, etc.

So I hope your bet pays off.

To everyone else- spending down assets to qualify for more aid is a risky proposition. For one thing-- your kid has to actually get into one of the colleges where on the margin, an extra dollar in an account translates to less aid (most colleges don’t care). For another thing, you are using last year’s aid information to project the next four years of financial aid policies which may work, or they may change their formulas. Or your kid may drop out of college in January of Freshman year to go to culinary school and the money which would have paid for it (in the UTMA account for example) has already been spent on the cars.

It may seem that assets hurt you. For most people, and in most situations, they can only help. More money generally means more options, more flexibility, less risk, fewer moving parts need to line up in order to afford college.

The income tax and possible 10% penalty is only assessed on the earnings portion of a non-qualified distribution. The part of any distribution that comes from money originally invested is never subject to income tax or a penalty.

Generally speaking, the full control of a UTMA account goes to the legal owner/beneficiary of the account when that person reaches the age of majority under state law. For this reason, the custodian’s use of a UTMA account as a savings vehicle for an event that will very likely take place after the account owner gains control of the account is probably not a good idea.

Yes, daughter will qualify for need-based aid even though we were able to save so much in the 529s. The 529s and UTMAs were funded mostly from one-time windfalls such as a small inheritance I received and a personal injury settlement from when ex-husband was injured. Plus we were able to save from our incomes in the past, but ex-husband’s income has been greatly reduced due to unplanned early retirement due to poor health. The upshot is, we planned on not qualifying for any need-based aid and saved accordingly, but now we do. I really hope daughter goes to in-state public anyways, but I am being reluctantly supportive of her dream of going to U of Chicago. She is valedictorian with high test scores and has a shot.

If your daughter’s 2016 tax return shows significant dividends, interest, or capital gains and yet you are reporting minimal student assets most top tier schools (i.e. UChicago) will ask questions. Just be prepared to explain that she used to have an UTMA and the funds have been spent and no longer exist. The detail expected by the school will vary and what they do with the information will also vary. However, if you can prove the UTMA no longer exists as of your application date it should not be counted.

Trying to prove that something doesn’t exist is a fool’s errand. A rational explanation, accompanied by the required financial aid forms which are signed under penalty of law, should be sufficient.

Take a deep breath, my bother. Paper trails, digging, financial aid audits–you’re worrying yourself sick over misconceptions.

  1. Keep reasonably careful notes of what you spend the UTMA funds for–that’s all that’s required. Car in your name–so what? Is she using it? It’s for her benefit isn’t it?

  2. IT IS PERFECTLY LEGITIMATE to spend down or otherwise transfer her UTMA funds as long as you do so for her benefit. The financial aid forms don’t ask for last month’s balance. You are attesting to the value of the UTMA account(s) on the day you sign the form, end of discussion. It is a snapshot of your finances. There is no ambiguity as to what the value of her account was yesterday and what it is today. Organizing your family’s finances in such a way that it maximizes financial aid is prudent and perfectly legal–and indeed, expected–provided that you are perfectly honest in your answers to the questions on the form.

Stop squandering the money on luxuries and move the entire balance to an “UTMA 529 Account”. That legitimately moves the funds from HER resources that go toward college (20%) to the percent of YOUR resources (5.6%) that you are expected to contribute. (You may want to consult your accountant first on possible capital gains issues in liquidating existing UTMA investments.)

See a WSJ this very issue: https://www.wsj.com/articles/when-to-move-money-from-an-ugma-to-a-529-college-savings-plan-1401482057