<p>I understand that we can transfer funds from UTMA (son's name) to our account, when reimbursing ourselves for expenditures on his behalf - ie lessons, summer program, etc. My question is, how old can the expenses be that we are reimbursing ourselves for?
I've waded through IRS docs and can't find anything.
Does anyone happen to know if there is a time limit rule? Or maybe it doesn't matter, as long as the expense is legitimate and well documented?</p>
<p>Hoping someone can point me to a knowledge source, OR has experience of your own to share. Thanks</p>
<p>That's a really good question. Ideally the reimbursement should be as near in time to the expenditure as possible and of course, documented. A main reason you can't just switch funds from kid's name to yours as you please is that some of the interest on his account is taxed at a lower rate (or not at all) than if the funds were in your account. So if you want to reimburse yourself for camp tuition incurred eight years ago and that $$$ has been sitting in his money market account all that time you could owe taxes on the interest over eight years.</p>
<p>I thought the taxes were owed on the funds taken in the tax year it was disbursed. Is that wrong? My tax person doesn't know either!!
I was just hoping maybe someone here may know where I could locate source information. We live in a small place and I'm striking out with the local tax folks.
Thanks for the response, Muffy.</p>
<p>I have no personal knowledge of UTMAs but tried googling your question. It seems something of a grey area but here is one site I found that adressed the question (toward the bottom of the page).</p>
<p>
[quote]
It is not possible to transfer money back to the parent from a child's custodial account because the original transfer was an irrevocable gift. Once the money has been given to the child, it is owned by the child. The child does not have the capacity to gift the money back to the parent, and the custodian would be violating his or her fiduciary responsibility if he or she transferred the money back into his or her own name or used it for his or her own personal benefit. (If a custodian does this, or otherwise behaves in a fashion that the IRS interprets as indicating that no gift was actually ever made, the custodian would owe back taxes at his or her rate, plus penalties. Also, the child could sue to recover the funds.)</p>
<p>However, nothing prevents the custodian from spending the money for the benefit of the child, so long as the expenses aren't "parental obligations" or otherwise benefit the custodian. Parental obgligations are expenses a parent is normally expected to provide for his or her child, such as food, clothing, medical care and shelter. But if your child wants a computer or to go to summer camp, it is usually acceptable to spend the child's money on those expenses. Likewise, you can spend the child's money for the child's college education. The parent can then set aside some of his or her own money in a college savings account owned by the parent. Obviously, this only works if there are non-parental obligation expenses that the parent would otherwise have provided for his or her children. Attempts to undo an UGMA transfer in this fashion should only be done in consultation with a qualified accountant.</p>
<p>orjr-My response was based on the parents and child each having an interest bearing account where interest is taxable each year, so if the money was in the kid's account for 8 years after camp there would be 8 years of interest. </p>
<p>If the funds were in stock that doesn't pay dividends and needed to be liquidated to be disbursed, then tax on the capital gain on the liquidated stock would be payable in the year the funds were disbursed. I think any record of stock that has been in the kid's name forever being liquidated to transfer to mom and dad is a red flag.</p>
<p>Hopefully your accountant will give you reliable advice. I agree with the above post. Personally, I always take $$$ from my kids accounts and write a check to the camp or SAT class within the same week so it is obvious that funds were only paid from my account because I have a checking account and my kids do not.</p>
<p>The scenario is someone just realized it is a bad idea for college financial aid to have UTMA funds. Thus, the goal is to reduce the amount of these funds by transferring them to the parents in order to reduce the FA bite. It is acknowledged that the trustee/parent can spend the UTMA funds on on "nice things" for the kid without getting into trouble, as opposed to necessities for the kid which cannot be paid for with UTMA funds.</p>
<p>So, after recently realizing the problem, how far can one look back in the quest to reimburse the parent for past nice things, to be reimbursed out of the UTMA account? The answers above that it is best to reimburse immediately after the expense are obviously correct but do not address the question of: assuming we did not do that, how far can we look back now?</p>
<p>Please don't rely on anonymous internet sources like me...HOWEVER, if the parents paid for summer camp in 2003 and did not expect at the time they paid for camp to reimburse themselves then the camp tuition is a GIFT to their child and cannot be revoked. So if it is a situation where the parents in 2008 realize they should reimburse themselves for all the "nice things" they gave to their kid from UTMA funds in years past, I would advise them not to do that; they are completed gifts and not revocable.</p>
<p>But would it be unreasonable, in early 2008, to go back to 2007 and add up all the application fees, SAT sending fees, college visit costs, etc and reimburse yourself? What about going back to 2006?</p>
<p>It boils down to how much risk do you want to take? An argument might be made that it is in the child's best interest for there to be the maximum amount of financial aid available to the family. Thus, one might say, in the grand scheme of what's right and wrong, it is right to reverse the UTMA and get the money back to the parents. "Right" in the sense that no one will burn in hell for doing it.</p>
<p>In Muff's scenario, summer camp was paid for 4 years ago out of the parent's account. I'd say, unless it was definitively decided then to give the summer camp to the child, as trustee, it would be ok to retroactively decide to pay for camp out of UTMA funds and reimburse the parent now. In other words, if, out of ignorance, the question was not decided in 2003, it is still open to be decided now in favor of reimbursement.</p>
<p>So, given that there is a reasonable basis to hang your hat on to get what you want, is it worth the risk that someone might question it? And if so what would be the consequences?</p>
<p>I based my analysis on the IRS definition of gift. The length of time between the expenditure and the reimbursement would be evidence of whether the intent to reimburse was present at the time the expenditure was made.</p>
<p>I had the FAFSA epiphany (I have to pay WHAT???!!!) about seven years ago and have made every effort to pay for the fun stuff out of my kids' funds, but I'm sure there is at least $10,000 of various lessons and camps and trips to Six Flags that could have easily been taken out before that...I think doing a transfer now would be pretty hard to justify. There are a lot of reasons why people might be picked for a FA verification or an IRS audit and some are picked just at random. But again, I'm just an anonymous poster and nothing I say should be determining anyone's financial future.</p>