<p>My parents have started purchasing stock for my two kids (one is an incoming college freshman). Currently, the stocks are listed in my name custodian then their name, but the tax form uses their SSN (per issuing co.) My question, how will this effect our filing of FASFA in the 2010 and is there a better way to set it up (my parents set up this way).</p>
<p>If the SSN on the account is that of one of your parent’s, then he or she “owns” the account and presumably will pay any taxes on capital gains & dividends. As long as the account is titled that way, it won’t be reported on FAFSA and will have no impact on your filing. Only accounts that are in your name/SSN would be reported in the parent section of FAFSA.</p>
<p>Alternatively, your parents might want to consider setting up a grandparent-owned 529. They could set up 2 accounts, one for the benefit of each child. These are also invisible to FAFSA. There may be some tax benefits, depending on the state, to your parents. My parents got a generous state tax credit from Maryland for setting up a 529 in their state that wasn’t available to me in California. The downside is that individual stocks can’t be part of the 529.</p>
<p>I’m not sure I see the benefit of you being custodian of the stock account, other than for estate planning purposes (ie it might not need to go through probate).</p>
<p>If you are the custodian, then that would indicate “their” is the children. Is that correct?</p>
<p>If so, your parent’s set up a UTMA or UGMA for your children (a custodial account). Unfortunately, this is just about the worst asset to have when sending kids to college. IRS restrictions prohibit you from moving the money out of a custodial account.</p>
<p>First thing to do is stop putting money in those accounts. Have the g-parents set up standard investment accounts intended for the students in the g-parents name. They may want to list the students as beneficiaries should something happen to them. In no way, should the students be formally attached to these accounts.</p>
<p>As for the money already in the custodial accounts there’s two things you could do. Spend it now on non-maintenance items for the students (those expenses not normally associated with the raising of a child). That would keep the IRS happy. Or you could look at sheltering within the custodial account into a non-assessed asset such as an annuity, life insurance, etc. This can be real tricky however.</p>
<p>Not clear from your description who you’re the custodian for, but I’m assuming it’s for your children (the ones eventually going to college). If that’s the case, it’s a poor way to set things up for FA purposes, as the account is considered as an asset of the student. Student assets are counted more heavily than parental assets in the FA formula. Also, at the age of majority (typically 21 in most states for UTMA accounts, but 18 in some), the assets can be used by your children for ANY purpose, like that ultra-cool motorcycle they have to have.:eek:</p>
<p>As noted above, 529 accounts have a lot of advantages over custodial accounts (as well as disadvantages). If you want to learn more, you can go to the Joe Hurley site, savingforcollege.com, or talk to a financial advisor (though if selling a 529, they’ll likely recommend one with a “load” so as to be paid for their advice). Though you’d have to sell the stock, you could open a custodial 529 account, which has advantages over a brokerage custodial account for FA purposes. Future dollars could go to a 529 account in your name or your parents’ name (even better for FA, as colleges don’t even consider the assets of grandparents currently).</p>
<p>Especially with one child on the verge of going to college, I think it might be well worth your while to get financial advice that’s specific to you from a local CFP. Good luck!</p>
<p>Has the IRS made a definitive ruling on transferring custodial funds to a 529 yet?</p>
<p>I understood that when the OP said “their SSN” he/she was referring to the original subject of the first sentence, which was “my parents”. But the other posters bring up a good point, which is if “their SSN” is referring to the grandchildren, then that’s a whole different ballgame.</p>
<p>If these are UGMA accounts with the parent as custodian and the child as beneficiary, then this is the least advantageous way to hold student savings. The solution would be to open a UGMA/529 account for each child and transfer the funds into those. UGMA accounts are assessed at the rate of 20% by FAFSA, while UGMA/529 accounts are only assessed at the rate of 5.6%. Capital gains would need to be taken, if any, and the funds transferred as cash, again losing the ability to invest in specific stocks.</p>
<p>As far as the IRS ruling on transfers, what I’ve seen is that transfers from UGMAs to UGMA/529s are allowed and are treated as a rollover that does not fall under the gift tax rules. From the IRS:</p>
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<p>[Internal</a> Revenue Bulletin - March 3, 2008 - Announcement 2008-17](<a href=“Internal Revenue Bulletin: 2008-9 | Internal Revenue Service”>Internal Revenue Bulletin: 2008-9 | Internal Revenue Service)</p>
<p>I transferred the bulk of my sons’ UGMA accounts into UGMA/529 accounts over the past couple of years. There is no IRS restriction on this. The brokerage required the UGMA/529s to be set up for the benefit of each son (ie the title had to be in my sons’ names), but there were no issues with the transfer.</p>