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Protecting student assets

gadadgadad Registered User Posts: 7,762 Senior Member
I'm sure this topic must have been addressed previously, but I couldn't find it with a search so I'll go ahead and post it here.

My wife and I have most of our savings tied up in retirement accounts and relatively few assets. Our daughters however, had UGMA funds started for them at birth by their grandparents. The funds have done well, so that they each have considerably more in liquid assets than my wife and I do. When the grandparents started this 17 years ago, they had no idea that colleges would tap 5-7% of the parents' assets annually for the EFC, but 30-35% of the students'. Since these funds are in our daughters' names, they have a huge "bullseye" attached to them. If 35% of them are tapped the first year, 35% of the remainder the second year, etc., over 82% of our daughters' inheritance will go to college tuition over four years (unless they lower their college ambitions to schools that will give them scholarships).

One approach to protecting their funds might be spending them down for their own expenses as quickly as possible. Once their UGMAs are exhausted, my wife and I would cover their college costs (taking the 5-7% annual hit instead of the 30-35% one) and gift their saved inheritances back to them incrementally after graduation. I can't imagine that there would be any tax complications with this.

A second approach would be to spend their UGMAs down immediately by having them pay off our mortgage and car loans. That would reduce their contributions to zero and allow us to cover college costs, then restore their assets afterwards. But in such a case, wouldn't we need to pay taxes on the money we'd be getting from them as a "gift?" If so, I'm not sure it would be worth it.

Any comments or critiques?
Post edited by gadad on

Replies to: Protecting student assets

  • emeraldkity4emeraldkity4 Registered User Posts: 35,861 Senior Member
    I believe that to use childrens money to pay off parents debt is illegal.
    You can use their money to buy them a computer or send them to camp, but not for things that parents are responsible for like clothes or food ( or a car- unless it is their car)
    I think paying for college is a great use of the money- isn't that what grandparents intended?
    To be able to attend the college of your choice without incurring huge debt is a wonderful gift-
    this thread has some info about paying for college
  • suzesuze - Posts: 4,479 Senior Member
    So you would rather have the government or wealthy alumni pay for your children's education when they have to money to pay their own way? Don't you teach your children good values? Save the money to buy material things later, education isn't worth spending your money on? This is sooooo bad!!!
  • SusantmSusantm Registered User Posts: 2,188 Senior Member
    So your daughters will still have savings left AFTER paying for college? How wonderful! Please leave the college's money to help those who need it more. My son will have thousands of dollars in loans to pay off after college, not a nice little savings account. There is a limited amount of money for student scholarships. Any money your daughters would get, after you hide away their savings, will take money away from those who do NOT have nice little nest eggs. Is that really what you want to do?
  • easydoesitmomeasydoesitmom Registered User Posts: 354 Member
    We had this UGMA too for our eldest and that's why the grandparents set them up -- for their education . I was glad the money was there for her when the time came ...............

    You will have a problem with capital gains tax and the schools FA office will see a copy of your ( & their ) tax forms and see that they had the means to pay when they do verification.

    If you are destitute and need to eat , and they are very young , you have no choice to but to sell them .
  • thumper1thumper1 Registered User Posts: 63,517 Senior Member
    In this instance, the student assets you are speaking of sound like they were set up to pay for college. Consider yourselves fortunate that you have these resources available to you. Most folks I know wish we had enough money in the bank to pay for our childrens' college educations. Use that money for college and be grateful that you have it.
  • dt123dt123 Registered User Posts: 1,178 Senior Member
    Gadad, legally the money in the UGMA accounts is your childrens' and to use it to pay off your mortgage and car loans would be considered (sorry, no way to sugar coat this) theft. Plus you would have to report the conversion of the funds on your income tax return as income, and failure to do so would be still another (sorry, again) crime. I'm sure you don't want to do this, because it's a bad idea all around.

    The only thing you can do is spend the money for them on things they need. Then take the 35% hits as you spend down the funds on college expenses. It's a well-known discrepancy in the way financial aid programs work, and can be planned around by well-informed grandparents ahead of time, but not after the fact like in your situation.
  • GodfatherGodfather Registered User Posts: 646 Member
    It's only theft if the daughters press charges obviously. If you planned to refund them, I doubt they would.

    I don't think it is often that legal action is taken against parents by their children. And the government isn't sitting there with nothing to do waiting to jump on a small case like that.

    I think Gadad is probably an honest guy who plans to give the money back, and means well with what he is doing.
  • somemomsomemom Registered User Posts: 10,447 Senior Member
    I think GAdad is probably a guy who, if he had known then what he knows now, would not have set up a UGMA account. If the money were in his name now (money he set aside for his kids or even money his parents gifted him) he could pay down the mortgage and cars quite legally and ethically. I am not sure how much money we are talking about, but this does definitely point out that knowing some of the rules makes a huge difference in the financial aid.

    All of this will be moot if his income is large enough that no aid is granted.
  • suzesuze - Posts: 4,479 Senior Member
    Isn't the point that what he wants to do is dishonest? They have the money, yet in his mind it's a good idea to hide it so someone else picks up the bill for his children's education. It's only the government or a bunch of rich people. We talked about exactly in an ethics class I took. His kids will also be dishonest adults because they had a parent who did such things and they begin to think everyone does it!!
  • somemomsomemom Registered User Posts: 10,447 Senior Member
    Maybe he did not realise it is dishonest? I would not think that some one planning to be deceitful would post on a public forum where he could theoretically be traced! Maybe he just wants to know what the rules are?
  • itstoomuchitstoomuch . Posts: 1,745 Senior Member
    in making the decision of UGMA's and being fortunate to have enough $ to substantially fund childrens' post HS education.

    I know how you feel because, 4 years ago I was in your position, but with a recent hugh high-tech downsizing, a depressed security market, and a top dollar school. Initially I felt that we should "mask" the assets which were in highly appreciated but devalued UGMA securities and other illiquid assets. It was too much trouble, too much risk, and the process would be more complicated than doing things the correct way.

    This is what we found and eventually did but not as early has you are doing. 1a) Purchase a tax program or pay a professional to determine UGMA tax liability if you liquidate the assets. 1b) Consult with several investment advisors until you get an opposing view from the majority advisors. 2) Decide in a general way, if the UGMA assets will be growing or decreasing if you left the assets alone, during the time of school. 3) Determine also in a general way if you "borrowed" the cost of schooling through unsubsidize Stafford (an assumption on my part) and a PLUS loan or even a home equity loan.

    Compare the investment return (dividends, interest, appreciation) to cost of loan (interest) and modify this preliminary result according to tax liability. If you discover that the cost of a loan is near to the growth rate of the investments, you can pay the loans off by the UGMA's over a longer period of time and give you and your children the flexibility to manage assets to everyone's benefit-including the Government and the school. IF you find that the interest on the loans is much greater than the ROR of assets-then liquidate the assets to bring the equation more into balance. IF you find that the ROR is much greater than obtaining loans-then get more loans to bring the equation into balance.

    Essentially you become the "chief financial officer" of your family. You can do this by yourself but don't be afraid to pay people for their expertise, just as you would pay a MD for their expertise and advice.

    PS: Don't believe everything you hear or read. This is your (kids') money-not the hired help.

  • emeraldkity4emeraldkity4 Registered User Posts: 35,861 Senior Member
    I dont think anyone can move the money- once the owner of the acct( the child) is at the age of 14?

    Look what I said last year! ( I sure know alot for not being able to help my daughter with her math)

    r 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 authority 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.)

    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, 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. 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.

    much depends on what type of account the money is in.
  • nedadnedad Registered User Posts: 487 Member
    ...of those who think this is a bad idea, and immoral to boot. Hiding money or disguising that is actually available so that taxpayers and alumni pay instead, and so that other truly needy students don't get the money, is a bad, bad, bad idea.

    I don't know why this even has to be said. No one owes our kids a college education. The government only guarantees our kids a public school education. We all have to do the best we can for college. If we can't afford a private college, we look for state schools, two years at a community college, living at home and commuting, etc.

    Then if we DO get aid from a top school - aid for which our kids ARE TRULY ELIGIBLE - then it is a gift that we should graciously accept, and hope that when are kids make it big, they will give back and help others.

    BTW anything your daughters "give" you over $11,000 is subjected to gift tax - but it is absolutely morally nauseating to think you would have them pay off YOUR mortgage in order to get more financial aid! It may also be illegal under the circumstances.

    Financial aid is a zero sum game - if you trick the taxpayers and alumni into wrongly giving your daughters what they don't need, someone else is deprived.

    So if they want to hang on to their assets, they should take out loans for college.

    Sheesh...it is utterly remarkable to me that this question was even asked.
  • NorthstarmomNorthstarmom Registered User Posts: 24,853 Senior Member
    " think GAdad is probably a guy who, if he had known then what he knows now, would not have set up a UGMA account. If the money were in his name now (money he set aside for his kids or even money his parents gifted him) he could pay down the mortgage and cars quite legally and ethically. "

    From what he has written, the money was given to his daughters, not to him. IMO what better use of the D's assets than to pay for their college education?

    I honestly don't understand why a parent would think that those offspring who have been so fortunate to have assets given to them should not be expected to use those assets to pay for their education.

    No one owes the daughters a college education. IMO the D are so fortunate to be able to apply to colleges without worrying about things like financial aid and loans. What better way to start their adult lives? ]

    I honestly don't understand how the father somehow seems to feel that the college, taxpayers, donors should pay for his daughters' college when they are fortunate enough to be able to afford it themselves. Most students in this country end college with a significant amount of debt -- about $20,000 worth. Most also restrict their college choices because of finances. Since it appears that the OP's daughters will be able to avoid these concerns, they are lucky, indeed.
  • emeraldkity4emeraldkity4 Registered User Posts: 35,861 Senior Member
    I hafta say I am sympathetic.
    I hear gadad saying that his daughters have fairly healthy accounts given to them by their grandparents. I remember when my children were young and it was recommended that child accounts be begun to save money for college, nothing was said about the percentage that is expected to be available by the college or that once they hit 18, it is their money and they can spend it on whatever they want.
    We did have a small($40,000) account for my oldest- that I transferred my inheiritance to, but we quickly spent it on private school.
    We also had to tap our own retirement account for her college tuition the first year ( I know, I know), but are building it back up again.

    What I would problaby do if I was gadad-
    keep adding to my own accounts for the kids college fund- ( in parents name)
    if needed- use some of kids accounts to pay for camp/tutoring( especially if it would be a hardship otherwise)
    Be happy at college application time- that my kids were able to look at the best schools in the country and have a good chance of getting in-paying for it.
This discussion has been closed.