Liquidating a UTMA - worth it?

[BelknapPoint]

I have a confusing situation compounded by a divorce, and only a few weeks left in the year to figure it out.

My parents set up a nice little UTMA for my kid; it has now grown to about $60K. I spoke with a HEFAR financial adviser who told me that 25% of the UTMA would count toward our EFC. However, if we were to liquidate that and put into a fund under my name, only 5% would count, which is a $12K difference. Significant!

The only legal way I know of to have this money count as a parent asset for your FAFSA EFC is to liquidate the UTMA and invest the funds in a student-owned 529 account. You can’t just take this money and put it in a fund in your name, because, you know, it’s not your money.

The issue is the cap gains tax. The HEFAR guy guessed it would cost around $3K, but said he wasn’t a tax person and I should ask mine. I don’t use a tax person and I don’t claim my kid; my ex does. So I called my ex’s tax guy who very nicely answered my general questions. However, the info he gave me seems to contradict what I’ve been otherwise told. Here is what he said:

1. If my kid files as an independent, that will reduce the EFC. I have heard otherwise. (Can my kid file as an independent? If so, won’t the FAFSA still want my tax info?)

Do you mean file financial aid paperwork as an independent? Vey likely that can’t be done.

2. Assuming a 15% federal and 6% state tax rate, selling off $60K would cost us $12-13K. (Would all of it really be taxed?)

You’ll only be taxed on the gains, not on the whole amount, and since it’s your kid’s money it will be on your kid’s tax return (the kiddie tax will likely apply, however).

I am now thoroughly confused. If tax guy is right, there is essentially no benefit to liquidating. We should sit tight, take our lumps, and be grateful for generous grandparents. However, I am not confident that he is right.

You’ll have to run the numbers under different scenarios. Is liquidating and taking the capital gains hit worth the lower asset assessment that would apply to a 529 account?