<p>I want to check my understanding of Uniform Transfers to Minors Account (UTMA) rules. My late dad set up such accounts for my children (his grandchildren through his first wife). In all cases his widow (his second wife) is the trustee on the account, and the children gain control of the account at age twenty-one. </p>
<p>What are the legal or financial consequences, if any, of the trustee spending funds from the account before the child is age twenty-one for the child's educational expenses? None of us are experienced with the law on this issue, nor or any of us sure if there are tax penalties or the like, but there may be a good real-world reason to spend some of the money this year (my oldest son's junior year of high school) while my son is still a minor to meet some of his educational expenses this year. Does that have to be documented in any special way? Does any such expenditure get taxed?</p>
<p>The trustee can spend funds in a UTMA for the benefit of the minor child who owns the account. These funds can be spent on a car, to pay income taxes, to buy a computer, to pay for high school or college tuition, etc. In general it's good to keep a record that matches withdrawals from the UTMA to the expense it was used to pay, but there are no tax consequences per se for the withdrawal and no legal restrictions on withdrawals.</p>
<p>Where there might be a tax consequence is if the funds in a UTMA are held in stock or mutual funds. The sale of the stock or mutual fund might result in the realization of a capital gain, so the gain itself is taxed (at the parent's rate). For example, if the UTMA has 100 shares of Google and 10 shares are sold and spent for the benefit of the child, then any capital gains that were realized on those 10 shares will be taxed. If there's a capital loss then the child gets credit for that loss up to certain yearly limits.</p>
<p>Depending on the amount of money in the UTMA's, your children will lose 20 cents/yr on the dollar. If they are repositioned into financial vehicles not included in the calculations, you and they will be much better off.</p>
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Depending on the amount of money in the UTMA's, your children will lose 20 cents/yr on the dollar.
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<p>Is this in reference to how UTMA accounts are viewed as assets when calculating student financial aid eligibility, or does this refer to something else?</p>
<p>I'm guessing the "losing 20%" is in reference to how FAFSA values children's assets, which for a UTMA would be 20% of the total value on the date FAFSA is filed. If these UTMA funds are intended to eventually pay for the child's college expenses, then it would be better to move them into a protected asset such as a child-owned 529, which is excluded as an asset from FAFSA. Note the distinction between a child-owned 529 and a parent- (or grandparent-) owned 529. In the case where you're moving money from an account that the child already owns (a UTMA), it must be transfered to a like account, which for this example must be a 529 owned by the child (also known as a custodial 529). This is in contrast to the more common way of owning 529s: most are owned by the parent for the benefit of the child, and as such the funds can be easily transferred from one child to another.</p>
<p>When the transfer from UTMA to 529 is done, it must be done in cash which means that all UTMA stocks/bonds/mutual funds must be liquidated, which may be a taxable event in the case of capital gains. The timing of taking these gains has an impact on financial aid as well. All of this needs to be carefully thought through and preferably done at least 2 years before filing FAFSA.</p>
<p>Be sure to check how the colleges to which your son may be applying will handle the trust if you plan to apply for financial aid. A friend of mine whose income is currently very limited but whose kids had "skip" trusts from the grandparents had significant financial aid amount challenges with one of the top "meets full need"/PROFILE schools due to the existence of the trust for the kid who had been accepted to the school. Apparently the schools have special rules for handling "trust fund babies" even if parental income and asset data would otherwise support generous FA.
I can't say I blame the schools, who probably feel that even if a kid does not have access to the money until age 21, at that point they could use it to repay their loans.
I don't know how the FA system could ever be redesigned to be *fully *fair in all cases -- same goes for the tax system! ;)</p>
<p>If a trust is for the benefit of the minor, then why shouldn't the trust be assessed 20%?</p>
<p>Suppose this trust is from a deceased parent's life insurance. Is it not one of the reasons to purchase life insurance is to insure that there is money to pay for college or if not college then for other things that hopefully enhance the heir's life? </p>
<p>Suppose two students of equal caliber and social economic-social status; One student of lower income and EFC=0. The other student also of lower income but with a trust from a relative (parent, grandparent, remote uncle and aunt, military-first responders death benefit) EFC= ?? .... Should the school(s) ignore the trust? </p>
<p>Ignore the tax consequences and be glad there is a trust and that the trust is paying the taxes, if any.</p>
<p>The situation I'm asking about isn't a general hypothetical, but a specific case in which the student has an educational expense today, before the student has enrolled at college (or even applied to college for a degree program) but the student has no control of the funds. Of course I think people ought to pay taxes according to law, but I'm just not sure what the law is here about whether the grandparent pays the tax, the student, or neither.</p>
<p>In general, the only taxable events for a UTMA would be the declaration of ordinary dividends or the realization of capital gains. You can in fact withdraw money from the UTMA to pay the associated taxes, if any. I had the impression that the original question had to do with a standard UTMA account where the grandparent was the custodian and the child was the beneficiary. This is not the same as a trust fund established for the benefit of the child.</p>
<p>We paid many things from the UGMA/UTMA for the benefit of son from age 1 to 22. Including taxes due on UGMA, airfares, people-to-people, HS orchestra Europe trip, Boys Nation (or like), reallocation of funds within the UGMA. The UGMA account paid thousands in taxes because of 18 years of dividends and capital gains/growth. Too bad that he missed out on Bushee tax cuts on dividends and capgains... would have save thousands in taxes. UGMA also benefited from cap losses.</p>
<p>The UGTMA/UGMA even paid the interest and principal on the unsubsidized Stafford loans and onthe PLUS loans ( which is now his obligation even though it was in parents name and credit). </p>
<p>We funded the UGMA, for the purpose of education. The education is now done (we hope) and how he wishes to use the money is his right to select the options that best suits his needs and goals.</p>
<p>Who is the beneficiary of the UTMA? Your son? If so, it’s already his money and he can do with it what he wants (assuming he’s no longer a minor). Is it the grandchild’s UTMA?</p>
<p>Check with a lawyer before you do that. It is my understanding that a UTMA account may not be used to pay the legal support obligations of a parent. I have seen cases in NJ where the court has said that and has claimed that this is the rule in other states as well.</p>
<p>“child-owned 529, which is excluded as an asset from FAFSA” FALSE.</p>
<p>I realize this is an old post but 529 assets were never excluded from aid calculations, they just switched from student asset (20% aid eligibility decrease) to parent asset (5.64% aid eligibility decrease). 529 withdrawals may also be subject to taxation - unlike what Wall Street says - per IRS Pub 970’s formula but QUALIFIED withdrawals cannot be counted as financial aid student income. That’s for FAFSA.</p>
<p>For CSS Profile colleges, 529s may be counted as STUDENT assets (25% hit) and withdrawals may be counted as STUDENT income (50% hit).</p>
<p>UTMA assets are always STUDENT (20%) and withdrawals are always STUDENT income (50%). Finally, Student Roth IRAs are not counted by either formula but student Roth IRA withdrawals are counted as STUDENT untaxed financial aid income.</p>
<p>Actually, a few years ago, there *was *a loophole for just one year when some new rules regarding 529s and FAFSA were written and they were worded in a way that that student owned 529 accounts were not required to be reported on FAFSA. The mistake was quickly corrected the following year and the wording changed to close the loophole. </p>
<p>I remember it as it was discussed at length here on CC. Can’t remember exactly when it was - some time around the time or soon after my daughter started college in 2007. Maybe around the time this thread originated, which is the problem with resurrecting old threads.</p>