How to withdraw custodial account funds (UGMA/UTMA) so they are traceable?
I have read quite a bit about how the UGMA/UTMA custodial accounts are not that great after all. So, I'm thinking about closing the custodial account (about 3K)and using the money for qualified expenses. My child is still 4 years away from college, and attends a private school with fin. aid., so I thought I could use the UGMA/UTMA money for tuition, a computer, camp, etc. Later, I might open up a 529.
Since the UGMA/UTMA account is not a checking account, I can't use it to make payments directly. The bank guy that handles the custodial account says he can close it and send me a check and I can deposit it in my own account and use it as planned and keep the receipts in an envelope. Does this work? And if it does work, can I justify the expenses with receipts of expenses made for the child before the check arrived ( previous tuition, previous qualified expenses)?
Any light on this will be appreciated. Thanks!
Keeping the receipts in an envelope would work fine. You could make a little hand-written schedule showing beginning balance and deductions as the money is spent. A nice touch would be to write the schedule on the envelope.
If you are paranoid you could go to your bank and open up a new checking account in your name, hopefully free, and call it "Johhny's UGMA Bridge Account." Deposit and spend UGMA funds out of that account. The beginning 10 or so checks they give with a new account may be all you need. The bank can always make a few counter checks if you run out and need a few more.
There was a heated discussion a year or so ago about whether it is sketchy to reimburse yourself retroactively for prior qualified expenses. Try a search. My own opinion is that it is OK as long as it has not been years since the expenses, and besides, who is going to squawk about it anyway? So you only have your conscience to worry about. If the expenses are relatively recent, it seems fair to apply the kid's funds when you find out you can.
we did similar to dt123 advice. We had UTMA trading account and UTMA check accounts. When we needed to spend money for tuition, we move money from the trading account to the checking account and then to the school.
I personally found the UTMA more flexible in practice, actual returns, tax issues than 529s. There are advantages in a UTMA that are not found in a 529 and for relatively small accounts a UTMA is a better way to go.
But for financial aid purposes isn't a UTMA reported as a student asset? A 529 is reported as a parent asset therefore only up 5.6% goes to the EFC and then only if there are enough assets for it to be unprotected. So an effect of 0 to 168 on the EFC. But a student has no asset protection so 20% of the UGMA goes to the EFC - 600.
Thanks for the advice LongPrime and dt123. And swimcatsmom, I think you are correct, that is one of the reasons a 529 sounds better.
We have been withdrawing from the kids' UGMAs for years, once we realized what a mistake they were as a college investment fund. We just track expenditures on a spreadsheet, in case we're ever asked to account.
Just keep copies of all of the statements in a folder with a brief commentary showing where the money went. We had no problem in doing that with our kids in private schools. The tuition ate up the UGMA very, very quickly.
How about old expenses?
We have a utma for my older son. We would like to cancel that account. As I learned from the posts, its possible to do that and keeping track of the expenses is the best way to answer any questions in the future. Can we also use that fund for the expenses paid for him in the past 2 years? i.e., if we have evidence?
see post #2, 3rd para.
Since this topic comes up occasionally on this board, I've found some information that might be of further interest. Basically the writer is saying that anything withdrawn from a UTMA that's done for the benefit of the child is legitimate, even costs that would normally fall under the "support obligation" category. The author also says that withdrawals can be done to (promptly) reimburse for past expenses, and to keep good records of such withdrawals.
[quote]Where is the line? The spending has to be "for the use and benefit of the minor." Those words are subject to interpretation, of course. The more aggressive you are in your interpretation, the more risk there is that you may be considered to have acted improperly. It's important to keep records of how the money was spent.
It seems to be an item of faith among experts that one area is off limits. I read over and over again that you can't use money from a custodial account to pay for expenses that are within your support obligation for the child. That's clearly incorrect. At the worst, there is a tax issue if you do this, but it isn't clear that the tax rule applies to UTMA accounts, and even if it does, the cost may be relatively small in may cases.
You can use a custodial account for support, and doing so won't necessarily create a tax problem.
A custodial account under the Uniform Transfers to Minors Act can be used to pay expenditures for the benefit of the child. It's frequently said, incorrectly, that the expenditures cannot be for something that is included in a parent's support obligation. The Uniform Act plainly says exactly the opposite:
A custodian may deliver or pay to the minor or expend for the minor's benefit so much of the custodial property as the custodian considers advisable for the use and benefit of the minor, without court order and without regard to (i) the duty or ability of the custodian personally or of any other person to support the minor, or (ii) any other income or property of the minor which may be applicable or available for that purpose.[/i]
It says the expenditure is proper without regard to a duty to support the minor. In other words, even if someone (including the custodian) has a duty to support the minor, the custodian can go ahead an make the expenditure, provided that it's for the benefit of the child. You can read in many places on the Internet and elsewhere that a custodial account cannot be used to pay for items that are within the parent's support obligation, but the language quoted above from the Uniform Act makes it clear that those statements are not literally correct.
[quote]Reimbursing past expenditures
Suppose you have expenditures that would be clearly proper for a custodial account, but they occurred in the past. Can you use the account to reimburse the parent for past expenses? There's nothing in the Uniform Act explicitly addressing this issue. The general standard set forth above requires the custodian to use the account for the benefit of the child, however, and reimbursing past expenditures that were incurred by a parent or other person is not for the benefit of the child. It should be acceptable to reimburse recent expenses that were incurred with an expectation of reimbursement; for example, the custodian might agree to use part of the account to buy an auto for the minor, advance money for the purchase from the custodian's account and then seek reimbursement from the custodial account. If the custodian does not seek reimbursement promptly after incurring the expenditure, however, the natural inference would be that the custodian made a gift at the time the expenditure was made, and is now recovering the gift from the custodial account, which would be an improper use of the account.
[url=http://fairmark.com/custacct/index.htm]UGMA & UTMA Custodial Accounts for Minors[/url]
Sec. 19 (3)
It does say in Sec. 19 (1) that
A custodian may deliver or pay to the minor or expend for the minor's benefit so much of the custodial property as the custodian considers advisable for the use and benefit of the minor, without court order and without regard to (i) the duty or ability of the custodian personally or of any other person to support the minor, or (ii) any other income or property of the minor which may be applicable or available for that purpose.
But in Sec. 19 (3) it was added and states that this payment is "in addition to, is not in substitution for, and does not affect an obligation of a person to support the minor" In other words the UTMA is not intended to be used for logical partental obligations. A parent still has an obligation to support his child and the UTMA should be used as an addition to the obligation.
OP should keep $$$ in UTMA and spend it down on kid expenses from there, not transfer the whole thing to the parent. Part of the income on the UTMA will not be taxed (I think something like $800) and part will be taxed at the child's rate (I think the next $800?), which is less than the parents' rate. Just keep records of what each withdrawal was spent on.
Also, you don't want kid to have gift tax implications; a transfer of over $12,000 to parents could mean a gift tax return.
There were a few $$ early on in a UGMA account, but then it was time for othodontia.
gift to minors act - withdrawal
I too have been looking into taking some money ($2,500) from my childs account to use for her college expenses next year. From reading, it looks like it is not that consequential re:taxes and/or penalties. I have $2,500 in a mutual fund account via UGTMA. Just reading some posts made me feel better. EM
good idea. glad i read your comment. I am doing the same now as my daughter prepares for college next year. em
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