<p>Son has a UTMA account worth about $50,000. Its entirely stock in one company and has grown through reinvestment of dividends. This account is the same age as he is. We've never spent a penny.</p>
<p>Son will enter college in one year and I'll be doing the FAFSA and CSS Profile in January 2013. </p>
<p>To reduce his assets, he could buy a car before I do the FAFSA, but the car would be an asset on the Profile, I think. He'll need a college computer -- I'm pretty sure that's a legitimate way to reduce his assets, but it won't make much of a dent. </p>
<p>What if -- he paid off my mortgage? He'll be 18 soon, but he doesn't have legal access to the account until he's 23. I'm the custodian of the account. We live together, and some day, this house will be his. What do you think?</p>
<p>We were told that they can look at what accounts/assets WERE in the child’s name in the recent past. Otherwise, parents could transfer all of Johnny’s accounts to Suzie, and then later transfer Suzie’s accounts to Mikey, etc. in attempts to hide the various assets. </p>
<p>In addition, Profile looks at home equity, which you would show $50K more of if your mortgage is paid off.</p>
<p>^ I’ll answer for the OP. Fifty thousand will be mostly used up in a year, leaving no guarantee of Federal assistance for the remaining 3 or 4 years that most kids need to graduate. With 50K in a kid’s name, FAFSA and Profile will give an expected contribution in excess of the first year’s tuition- regardless of the parent situation. Would you make any big purchase not knowing if you would be able to handle the future debt? It leaves people with low/middle income but healthy college savings in a bad predicament for college planning. </p>
<p>I would suggest you find a good accountant or tax planner who can guide you in the types of transactions that are known to trigger audits. I suspect that the purchase of a car and computer will pass muster, but not the paying of a mortgage unless you transfer title- Not a good idea!</p>
<p>Paying off the mortgage would be tricky, in that you would need to add his name to the deed, or most of the money would be considered a gift to you, and he would need to file a gift tax return. But by adding his name to the deed, a percentage of the home becomes his asset for the profile. And because it becomes his asset, it is treated differently than if it is entirely in your name.</p>
<p>This is something that should have been thought through once he started high school, because there is little it can now be spent on without throwing up a red flag. In fact, if he pays off the mortgage, you run the risk of him providing more than half of his own support for the year, making him independent for income tax purposes. He probably won’t owe taxes (and it is to his benefit to be independent if he does), but you would lose him as a dependent, and any other tax benefits based on him being a dependent (such as earned income credit).</p>
<p>Perhaps it’s time to consider that you are fortunate to have 50,000 saved for his education, and won’t feel as much of a pinch when the tuition bills come due. With FAFSA, he will be expected to contribute 20% of whatever is in the account each year - so $10,000 his first year, $8000 the second year (20% of $4000), $6400 as a Juniors, then $5120 as a Senior. That leaves him with more than 40% of the money left and a college degree. They don’t take 20% of the original amount each year, as some people assume. Remember, you fill out the FAFSA and profile each year, and some of that asset will be gone.</p>
<p>I don’t think purchasing a car would “pass muster,” as momsquad says, because I’m almost sure that the Profile asks about cars and when they were purchased. </p>
<p>Oh, wait, did momsquad mean you should just lie about it? </p>
<p>I would hate to see CC used to pass along tips to defraud the federal government when there are so many legitimate, legal ways that this forum is used.</p>
<p>Lie about what? Purchasing a car for the use of the UTMA beneficiary is an entirely legitimate use of the money. Once the government can get a handle on Medicare fraud they can begin to worry about the terrible abuse of middle income taxpayers trying to optimize their college saving strategies.</p>
<p>Thanks to @CTScoutmom for excellent reply to OP.</p>
<p>Momsquad, federal aid only comes to those with very, very low efcs. If the OP’s income is even, say, about 50-60k+, the student isn’t getting federal aid with or without the account.</p>
<p>Also, 50k would only be used up in a year at a very expensive school. The majority are well below that mark.</p>
<p>Use of your son’s UMTA to pay down your mortgage would probably violate your fiduciary duty to your son as the trustee of his assets. I’m no lawyer, but he would probably have grounds to sue you, unless he agreed to this beforehand. And, as CTScoutmom says, he would probably need to file a gift tax return.</p>
<p>You might investigate a single premium universal life insurance policy for your son. He/you would retain investment control, have some access to the money via loans in the short-term, and more access in the longer term. These are complicated so consider carefully. Life insurance is not captured as an asset on FA forms.</p>
<p>OP here. Thanks for the thoughtful advice. Let me clarify something, though. My post headline is "Legitimate ways … " I’m not looking to hide anything or defraud anyone, and I assume the information shared here is offered in the same spirit.</p>
<p>The UTMA has no stated purpose, formal or informal. My son is the second-generation owner of this stock; you could describe it as an inheritance. To use it for his education is certainly appropriate, but he’s under no obligation to do so. When the UTMA was established, this vehicle of transferring the stock was a good idea. </p>
<p>Of course, when the UTMA was established, you could still “work your way through college” in our state. You could! A summer job and a campus job would cover tuition. Live with mom and dad, and you could graduate debt-free. Who can do that now? Four years of undergrad and then grad school today – I don’t have to tell you how much that can be. </p>
<p>I expect that the UTMA account will indeed be spent on his education, but I’d like to stretch those dollars as far as possible. Legally. We are certainly fortunate to have this money. I am also thankful for the gift of his good health and his many talents. </p>
<p>Anyway, this forum is so great for provoking new ways of looking at an issue/problem. Thank you for some creative ideas that are worth investigating. I think that the idea of having him pay off my mortgage is probably a can of worms. (And, sad to say, even with the influx of his funds, the house would be worth less than it was five years ago.)</p>
<p>As to FAFSA and Profile, anyone who has filled out these forms in the past knows how arbitrary the whole thing can be. If you have several children in college at one time, you get advantageous treatment. How is that fair to only children or children four years apart in age? At least there have been recent efforts to make the FAFSA more equitable for people who operate their own business.</p>
<p>But we live in a society that is based on the notion of common rules, and those rules I obey. (Said while gritting my teeth …)</p>
<p>Money in a UTMA must legally be used for the benefit of the minor. A car or computer purchase would be legitimate uses for this money. Paying down a mortgage would not as parents are assumed by the IRS to be providing the child a place to live.</p>
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<p>Yes, with a caveat. The child must remain the owner and the parents would be the custodian of a 529 funded via money in a UTMA. This kind of 529 is known as a custodial 529 or a UTMA/529. Most brokerages would be able to handle the transfer from a UTMA to a custodial 529. However the stock must be liquidated first as 529s can only be funded with cash. The OP should calculate the capital gains tax hit; the capital gains tax can be paid by the student from the proceeds of the stock sale.</p>
<p>The FAFSA formula considers 20% of student assets to be available for college ($10,000 of the $50K UTMA) and 5.6% of 529 assets to be available for college ($2800). Therefore the marginal contribution of the student’s UTMA to his EFC is $7200 in the first year.</p>
<p>If the entire $50k is intended for college, one approach would be to sell the stock, take the capital gains hit in 2012 (which will increase the student’s reported income as well), transfer everything to an age-based 529 (will be mostly cash) and withdraw $15K/year to fund college. </p>
<p>As a side note, this kind of planning is best done two years before the student goes to college because then the income isn’t reportable on the financial aid forms.</p>
<p>Before you do anything, run the numbers to calculate your EFC to see if the $7200 increase will make a difference.</p>
<p>Can you specifically identify expenses that you have paid for your son, such as fees for sports, camps, summer enrichment programs, etc? D1 attended a pricey Ivy-league summer program before her senior year and we used funds in her UTMA for it. </p>
<p>As stated above, paying income taxes out of the UTMA are a no-brainer.</p>
<p>We found the book “Paying for College without Going Broke” very helpful. DH owns his own business, and this book clarified a lot of things for us. I picked up a copy at the local library, I believe it is updated yearly but for a general overview the prior year edition worked.</p>
vballmom, if “The child must remain the owner”, then same 20% of that fund is considered available for college. So there is no advantage to convert it into a 529 for the purpose of EFC calculation, right?</p>
<p>Ici, I’m glad to hear you are truly looking for legitimate options here.</p>
<p>To the others, I don’t deny that buying a car would be a legitimate use of funds in a UTMA; I deny that it would be a useful way to increase financial aid.</p>
<p>Buying your child a $20,000 car will not necessarily result in a $20,000 increase in financial aid and therefore would not be a useful strategy if the goal is to maximize funds for college. The CSS Profile provides a standardized way to allow financial aid offices to determine need. Completing it honestly will show that the student owns a $20,000 car purchased in August of his senior year. As a result, from the standpoint of the college, the student’s total assets will be the same as before the car was purchased, and from the standpoint of whoever is paying the bills, his assets are now a whole lot less liquid.</p>
<p>I would suggest you NOT pay off YOUR mortgage with HIS money while you are the custodian of HIS trust account. I might also suggest that you consult a lawyer before getting too creative. JMHO.</p>