I am about to close a UGMA account for my son and receive a check. It is mid-November. I have a CHET 529 for our son that we set up earlier this year by closing out another UGMA account we had for him. That said, I could put $2,000 in and get a tax credit for this year. I am hoping to be able to hold onto the check from this mid-November UGMA acct close and deposit it into the CHET account in early January to get a 2016 credit. Anybody know if I can do that? How long can I keep the money (check) before I have to put it someplace for my son?
For clarity - we did put the $2k into the CHET to get a credit for this year. I want to close another UGMA this year and try to get the tax credit for next year –
Why don’t you wait until January to close the other UGMA account, and then simply deposit the funds in the 529 so you can get the 2016 tax credit? That way you don’t have to be sitting on a check for an extended period of time, with the possible complications.
The 529 account is a custodial 529, right? Who is getting the tax credit, you or your son? I hope you understand that this is your son’s money, and your son should be the account owner of the 529 (as well as the beneficiary, obviously).
There’s no hard and fast rule about how long you can hold onto the UGMA funds in the form of a check before doing something, but you need to remember that you are acting in a fiduciary capacity for your son. This means that you must manage his money in a way that is in his best interests. Leaving the funds in the form of a paper check, that can be lost, stolen, destroyed, etc., and where the funds are not insured or earning interest for an extended period of time, doesn’t sound like the smartest thing to do.
How old is your son and when is he planning on attending college?
That was my first thought, too. Money in an UGMA or UTMA account belongs to the child, not to the parent; the parent (or other custodian) has control of the account assets, but can use it only for the child’s benefit. If the parent takes money out of the UGMA/UTMA account and deposits it in an ordinary 529 account owned by the parent (even if the child is named as the beneficiary), that could be conversion. Or, in more familiar everyday language, stealing from your child, among other reasons because as the owner of the 529, you can ordinarily change the beneficiary designation anytime you want.
Some state 529 plans will allow the parent to open a 529 with funds from the child’s UGMA or UTMA account and place special restrictions on it, including no change of beneficiary, and control of the 529 account passes to the child at the age of majority (usually 18 or 21, depending on the state) just as if those funds remained in the UGMA or UTMA account. Other state 529 plans don’t ask any questions, leaving it to the parent to do the right thing.
Either way, though, I don’t see how you can generate a tax credit against your own taxes by opening a 529 account with your child’s money. But I’m no tax expert. Talk to your accountant.
I’ve also seen a lot of loose advice out there on the internet saying an advantage of shifting assets from an UGMA or UTMA account to a 529 is that for financial aid purposes, assets in an UGMA or UTMA are considered the child’s, with 20% expected to go toward college expenses annually, while assets in a 529 are considered the parent’s, with only 5.64% expected to go toward college expenses annually. Maybe some people are doing this, and maybe there’s no way for FAFSA or CSS Profile to catch it, but that seems improper to me. Legally, assets in a 529 purchased with UGMA or UTMA funds should belong to the child, not the parent, and should properly be reported as the child’s assets. Unless there’s some special rule I don’t know about.
Yes, there’s a special rule that you apparently are not aware of. FAFSA considers student-owned 529 accounts (includes custodial 529 accounts opened with UGMA/UTMA funds) to be parent assets, and they are to be reported as such in the parent financial section of FAFSA.
See the “Tip” at the bottom of page 72 of Completing FAFSA 2015-2016:
https://studentaid.ed.gov/sa/sites/default/files/2015-16-completing-fafsa.pdf
Schools that use CSS Profile can treat student-owned 529 accounts any way they wish, for the purpose of distributing institutional aid.
Thanks everyone. Planning for college in 2020. This will be for him in college. Will end up doing this next year. Anyone have any other good ideas for saving for college? My husband and I are both thinking of opening up Roth IRAs as well. That will help us pay for the later half of the education years for him. I’m trying to find ways that will help also qualify for financial aid in the future.
And, no - I am not trying to steal from my son. This is our money put aside for him. He’s only 13.
If by “our money” you mean the money in the UGMA, then you are wrong. Money in a UGMA/UTMA belongs to the child, and is managed by a custodian (usually a parent, but it doesn’t have to be) for the benefit of the child until the child reaches the age of majority (the specific age depends on state law). And UGMA money placed in a 529 still belongs to the child.