<p>Hello fellow parents,
I have a question as to how to best use $$ from my son's grandmother. He's starting at a private Jesuit college in the fall; he's rec'd some financial aid, but certainly not a full ride. My question is this: His grandma has been putting $$ aside, which now totals approx. $10K. It's not in a 529 or other college plan, however. It's in a "regular" investment plan, so will be subject to taxes upon withdrawal. We also have put aside about that much in a 529 plan (pathetic, I know!). I'm thinking that he should use her contribution first, and then we should go to the 529 (allow it to accumulate more tax free $). If we do, should he withdraw it and claim it on his taxes (he will only have income from a summer job and work study of about $2,400 for the 1st semester) or should we ask her to take it out, and subtract whatever tax liability she'd incur? Would appreciate your thoughts (and I do realize that it's opinions ONLY, not professional advice!) That said, any opinions are much appreciated!</p>
<p>I don’t know the tax parts, but it’s confusing as to who’s name Grandma’s money is invested under. Hers, yours, his, some combination?</p>
<p>If the $$ is in Grandma’s name, have her pay some portion of the college bill directly to the school to minimize tax/gift implications.
If the money is saved in son’s name, there shouldn’t be tax penalties if the funds are spent on his behalf.</p>
<p>Grandma is allowed to give him a $11 K gift each year with the tax man making a grab. Hint: She can give the same to you, as well.</p>
<p>There are two tax liabilities here:</p>
<p>1) Capital gains tax that account owner will pay on the appreciated value of the assets. It will be taxed at 15% for most investments and same as her income tax bracket for specialty investments. I don’t think there is anyway she can avoid incurring these taxes.</p>
<p>2) Gift taxes incurred by giving a valuable gift to another person. As others have said, a $10k gift won’t be subject to gift taxes because up to $11k or so each year can be given without incurring gift tax liability.</p>
<p>Thank you all for the input. To clarify: apparently the account is in his grandmother’s name, as custodian for my son (UTMA). She said that he’s prohibited from withdrawing the $$ himself in the state she opened it in until he’s 21 (MT), so she’ll have to take it out, since he’s just turning 18.</p>
<p>Yes, Marzies, under the UTMA in your state, she will have to do it that way.</p>
<p>Some of the posters above gave you a little outdated info. This year (and next) the amount that can be given without the imposition of a gift tax is $13,000 per donor. She may want to file Form 709, but doesn’t have to if it’s under that amount. Alternatively, if she wants to contribute more than that amount, she can either do so, file Form 709 and use the excess as a reduction in her lifetime unified credit (and pay nothing in gift tax – it just reduces the size of her lifetime credit by the excess); or if in excess, pay the tax, which this year has been reduced to 35%.</p>
<p>If Grandma takes the money out and pays the school directly, her receipt will show the UTMA funds were used for your son’s benefit, should Grandma be audited.
This will allow for an annual additional up-to-$13,000 gift to your son (if Grandma so chooses).</p>
<p>Well, if the money is in a UTMA under your son’s SSN, it’s already been “given” to the grandson over the years. He’s the one who will have to pay the capital gains tax (if any) when the account is liquidated, and presumably he declared this as an asset on his FAFSA. The grandmother, as custodian, can arrange to have the funds transferred directly to the college, or have the funds withdrawn and a check made out to your son (even if he’s a minor in your state). Your son can then write a check to his college to pay tuition/fees/whatever. The duties of the custodian are to ensure that the money is spent for the benefit of the beneficiary. For UTMA funds, unlike 529s, this money doesn’t have to go directly to pay a qualified higher education expense.</p>
<p>If his grandparent wants to gift him money, it would have been advisable for her to have set up a 529 for your son rather than a UTMA, but that’s probably water under the bridge.</p>
<p>At any rate, if you have a choice of which funds to spend first, spend down the UTMA, then the 529, all other things being equal.</p>
<p>If your son will be receiving financial aid, and you didn’t already list the UTMA money on his FAFSA (and CSS Profile, if applicable) under student assets, then it would probably would be best to correct the FAFSA, etc NOW, rather than have the school find out later that you failed to declare it.</p>
<p>On edit - since your son is getting Work/study funds, he IS on FA, and you may need to correct your FAFSA.</p>
<p>Also, your idea of using grandma’s funds first while allowing the 529 to grow is a good one for another reason. In 2010, capital gains tax is still 15%. It’s sure to increase next year. So if those funds are withdrawn this year, the taxes will be a bit less, too.</p>
<p>I thought I heard on a radio finance show that the amount a person can gift a family member without tax implications is going up to 13K. Is that correct?</p>
<p>I had a very similar situation, and since Grandma’s investments were attached to D’s SS #, they did have to be declared on FAFSA and CSS. We are still working out the logistics of tax benefits as to how to withdraw it.</p>
<p>13K is the max allowed per gift without being taxed. If Grandpa is alive also, both Grandma and Grandpa can give a 13K gift per year with no tax ramifications. However, each person has to make a check in the amount of 13K - the checks can’t be combined into one 26k check. This is a great way for grandparents who can financially contribute to avoid paying taxes on the money. They can give money to each member of the family.</p>
<p>^ It avoids gift taxes but not capital gains or income taxes. Not sure if Grandma or Grandchild would be responsible to pay capital gains/income taxes (believe it is grandchild) but they would have to be paid by somebody.</p>
<p>If Grandma writes the check directly to the school for the benefit of son, there is an exemption from the gift tax.</p>
<p>Folks, </p>
<p>The OP was NOT asking about gift taxes. He/she was asking about capital gains or income tax liability.</p>
<p>If the account is a UGMA or UTMA, any dividend income and capital gains would need to be declared on the child’s tax return if over a certain threshhold. For 2009 taxes, the child’s allowable investment income amount is $1,900, with the first $950 in earnings exempt but the next $950 taxed at the child’s rate. After that, the tax is assessed at the parents’ marginal rate.</p>
<p>In the OP’s case, on a $10,000 account there might not have been any taxable income or capital gains over the years (as in the case of an investment entirely in stocks). And it’s possible that the capital gain on liquidation won’t be very high if the money was invested in mutual funds which distribute capital gains every year. Good records are important here to determine the cost basis of the investment(s).</p>
<p>The gift tax exclusion was $12,000 in 2008 and $13,000 for 2009 and 2010. As bigtrees and others have pointed out, the gift tax is irrelevant for the OP, but Tatin is correct that checks from Grandma directly to the school avoid this issue entirely. Gifts are never taxable to the recipient; the only person who has to worry about staying under the annual or lifetime limit is Grandma, and it doesn’t seem like she’s at risk for hitting either limit.</p>
<p>
and to your husband … and grandpa (if he is still in the picture) can also give $11k each year to the student, you, and your husband … and all of those gifts would be tax free. PS - grandma paying the school directly also works as someone mentioned earlier.</p>
<p>just curious: Is there any tax benefit if the OP’s son withdrew it when he turned 21 and used it for college education? In other words, use the 529 plan now and UTMA when he is 21? Would there be a tax advantage or does it not matter, the same taxes will paid either way?</p>