Questions about UTMA and Coverdell funds

Paying for College
1

<p>My parents are divorced, so my mom is considered my parent on the FAFSA and PROFILE, both of which I have to fill out for my school (accepted Early Decision). I have $37,000 in UTMA funds that are managed by my dad, $3,000 Coverdell managed by my dad, and $15,000 in a 529 managed by my grandparents.</p>

<p>The school gets my EFC from FAFSA, but it also considers PROFILE data for grants and whatnot, so there is a lot of confusion...</p>

<p>Do I have to report the Coverdell or the 529 on the PROFILE or FAFSA at all, since these accounts aren't in my divorced mom's name? Secondly, would I benefit if the UTMA funds were converted to UTMA-529? I would still have to report this as a "student asset" on the PROFILE, but I wouldn't have to report it at all on the FAFSA since it's in my (non-parent) Dad's name, right?</p>

<p>My parents have not kept up with this, and my mom makes around 50k a year, so it is important for college to be as cheap for me as possible.</p>

2

<p>Assets that are owned by you must be reported on both FAFSA and Profile, regardless of who the custodian is. </p>

<p>Let’s take each of these accounts separately. A UTMA is an account owned by a minor, so you own the UTMA, even if your father is the custodian of the account. A Coverdell is an educational savings account; in your case it’s owned by your father with you as beneficiary. A 529 is another type of educational savings account, in your case owned by your grandparents with you as beneficiary.</p>

<p>The FAFSA only requires information about assets owned by the custodial parent and/or owned by the student. Assets owned by the non-custodial parent or other relatives, even when the student is a beneficiary, are not reported.</p>

<p>For FAFSA:</p>

<ol>
<li> Report your UTMA as a student asset because you own it.</li>
<li> Do not report your Coverdell as a parent asset because it is owned by your non-custodial parent</li>
<li> Do not report your 529 because grandparent assets are not reportable on FAFSA</li>
</ol>

<p>For Profile the family must list all 529 accounts that name the student as a beneficiary, so plans owned by a grandparent but with the student named as a beneficiary would have to be reported. I believe this includes the Coverdell account as well.</p>

<p>On the Profile:</p>

<ol>
<li> Report your UTMA as a student asset</li>
<li> If your father is required to fill out the non-custodial Profile, he must report the Coverdell as a parent asset. If your father isn’t required to fill out the non-custodial Profile form (not all schools require it) then your mother must report the Coverdell as an asset for which you are the designated beneficiary. Do not double-report your Coverdell.</li>
<li> Grandparent-owned 529s are reportable on Profile; you would report it as an asset for which you are the beneficiary</li>
</ol>

<p>Your father, as custodian of your UTMA, can convert it to a UTMA/529 account. That would be beneficial to you as UTMAs are assessed at 20% for FAFSA while all 529s are assessed at the parent rate of 5.6%. It’s still your asset and it still needs to be reported on both FAFSA and Profile because you are both the beneficiary and the account owner.</p>

<p>Your UTMA must be in cash before it can be converted to a UTMA/529, which means if you own any stock or mutual funds, these must be sold before the conversion. When stocks are sold there may be capital gains (which counts as your income) and taxes (which must be paid when an appreciated stock is sold) to be considered. In addition, once the funds are in a 529 account, they can only be used for qualified higher education expenses. If they’re used for other purposes then you’ll owe taxes on the net gain - which might not be an issue if the gain isn’t very large. You just lose a little flexibility. It’s important for you and your father to do the math to figure out if the conversion is worth it. If no taxes would be owed and all the money will be spent on college expenses anyway, then it’s fine to convert from a UTMA to a UTMA/529.</p>

3

<p>PA-120A on the PROFILE says this: “Include funds held in Section 529 prepaid tuition or college savings plans or Coverdell education savings accounts established for you and your brothers and sisters”</p>

<p>For clarification, does this mean I must include funds that were established by my grandparents (and non-custodial father) and held in their names for both me AND my sister and report them under my mom’s assets? That doesn’t seem right. Also, does this really have an affect on aid?</p>

4

<p>Yes, you must report sibling 529s and Coverdell accounts. Make sure they’re not double reported by your father if he files the non-custodial Profile. The effect on financial aid is not always clear because Profile schools are free to use the reported information according to their own algorithms. </p>

<p>Does your ED school have a financial aid calculator on its website? If so, you can plug in your numbers with and without your sister’s funds to see if your estimated need changes.</p>

5

<p>Actually, since my Dad reports my sister on his taxes and my parents are divorced, I do not have to report my sister’s 529s and Coverdell accounts, correct? My Dad does not have to fill out the non-custodial Profile either, so I’m correct in assuming that this will go unreported.</p>

<p>Also, since I get full control of UTMA funds when I turn 18, can I just turn around and “gift” that money to my Dad, and then he can write me checks for my college from a bank account with this money. Is this legal?</p>

6

<p>Ok if your college does not require the non-custodial Profile, then assets owned by your father with your sister as beneficiary are not reported at all. </p>

<p>You can do anything you want with the money in your UTMA once you turn 18, but there’s a Federal limit on gifts that can be given tax-free which is currently $13,000. Any gift given over that exclusion limit is taxable. The giver pays the taxes. </p>

<p>If this money is intended for college, just stick it into a student-owned 529, invest it conservatively, and you’ll be fine. At $37,000, the increase in your EFC will be $7400 if it’s in a UTMA, or $2072 if it’s in a UTMA/529. You’ll easily earn that $2072 in interest if it’s in a 529 which pays for the increase in your EFC right there.</p>

7

<p>Okay, thank you.</p>