<p>Since this topic comes up occasionally on this board, I've found some information that might be of further interest. Basically the writer is saying that anything withdrawn from a UTMA that's done for the benefit of the child is legitimate, even costs that would normally fall under the "support obligation" category. The author also says that withdrawals can be done to (promptly) reimburse for past expenses, and to keep good records of such withdrawals.</p>
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Where is the line? The spending has to be "for the use and benefit of the minor." Those words are subject to interpretation, of course. The more aggressive you are in your interpretation, the more risk there is that you may be considered to have acted improperly. It's important to keep records of how the money was spent.</p>
<p>It seems to be an item of faith among experts that one area is off limits. I read over and over again that you can't use money from a custodial account to pay for expenses that are within your support obligation for the child. That's clearly incorrect. At the worst, there is a tax issue if you do this, but it isn't clear that the tax rule applies to UTMA accounts, and even if it does, the cost may be relatively small in may cases.
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You can use a custodial account for support, and doing so won't necessarily create a tax problem.</p>
<p>A custodial account under the Uniform Transfers to Minors Act can be used to pay expenditures for the benefit of the child. It's frequently said, incorrectly, that the expenditures cannot be for something that is included in a parent's support obligation. The Uniform Act plainly says exactly the opposite:
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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.*</p>
<p>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.
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Reimbursing past expenditures
Suppose you have expenditures that would be clearly proper for a custodial account, but they occurred in the past. Can you use the account to reimburse the parent for past expenses? There's nothing in the Uniform Act explicitly addressing this issue. The general standard set forth above requires the custodian to use the account for the benefit of the child, however, and reimbursing past expenditures that were incurred by a parent or other person is not for the benefit of the child. It should be acceptable to reimburse recent expenses that were incurred with an expectation of reimbursement; for example, the custodian might agree to use part of the account to buy an auto for the minor, advance money for the purchase from the custodian's account and then seek reimbursement from the custodial account. If the custodian does not seek reimbursement promptly after incurring the expenditure, however, the natural inference would be that the custodian made a gift at the time the expenditure was made, and is now recovering the gift from the custodial account, which would be an improper use of the account. </p>
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UGMA</a> & UTMA Custodial Accounts for Minors</p>