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UTMA taxes, liquidation

mikecourtneymikecourtney Registered User Posts: 1 New Member
edited January 2012 in Parents Forum
I am the custodian of a UTMA for my daughter, who is in early high school currently. I am curious what the tax consequences would be if I were just to liquidate the account and move it into a bank acct ? However, if I keep it in place as-is what kinds of expenses are allowable in terms of withdrawal beyond the typical expenses I have read about (e.g. Y camp, car, college) ? I am interested in accessing the money to pay for other enrichment activities for her, such as singing lessons, cake decorating classes, etc. If I withdraw for those things do I pay taxes on it ? (I have not withdrawn anything from it to date and am thus oblivious to the outcome)

Post edited by mikecourtney on

Replies to: UTMA taxes, liquidation

  • vballmomvballmom Registered User Posts: 3,135
    You pay taxes on the capital gain realized on the assets at the time they're realized, not when the money is withdrawn. For example, if your D owns 100 shares of Microsoft purchased at $20/share, and sells it for $25/share, her gain is $500 ($5 per share x 100 shares). She pays a capital gain tax on that $500 at the rate of 15%. She now has $2500 in cash in her UTMA. She (and you) can withdraw any of that cash at any time to pay for her qualified expenses which are outlined in the linked post.

    If the entire UTMA is in a money market fund, then you've been paying taxes on the interest every year and thus no new taxes will be assessed.
  • InvestInvest Registered User Posts: 1 New Member
    So...what if you put money ($15,000) into an UTMA (or UGMA) 10 years ago when your daughter is 6 years old and now you your daughter is 16 and you decide you need/want that money back to use as you wish. So you liquidate the account, put the money back into your own personal savings account, and spend it to pay down some bills.
    Is my assumption correct that as custodian, you would owe back taxes at my tax rate plus penalties? If so, and you are willing to accept that consequence, then so be it.
    But....are there any other consequences for doing this? (For example, go to jail or get sued by your daughter.)
  • intparentintparent Registered User Posts: 30,096 Senior Member
    The money placed in an UTMA is considered an irrevocable gift. You can't legally just take it back because you have "UTMA regret" (want to pay some bills, don't like the financial aid impact, think the kid will not use any remainder wisely when they hit majority age). You would be violating your fiduciary responsibility as a trustee to use that money for your own benefit. Yes, your D could sue you for this.

    However... the law is pretty generous in what is considered "for the benefit of the child". I think as long as you keep good records, the types of things the OP is listing (singing lessons, etc.) are okay. It is NOT okay to take the money and pay off your vacation home mortgage, your boat loan, or your credit card bill for things that do not benefit you kid. As far as I can tell, there is some fuzziness about whether you can spend the money on things that would normally be part of parental obligation to support the child (experts seem to vary on this topic, I wouldn't do it without talking to an account and/or attorney myself).

    It is fine to liquidate an UTMA investment and move it to another form (eg, sell an UTMA mutual fund and move the money to an UTMA money market or UTMA savings account). Again, this is what the OP asked. But you can't just take the money and move it to a non-UTMA account with no evidence that you paid for something of benefit to your kid.

    If you have having regrets because of the impact on Financial Aid, there is a possibility of rolling the money into a 529 (where it becomes an asset of the parent for financial aid considerations, not the child).
  • Dad_of_3Dad_of_3 Registered User Posts: 2,067 Senior Member
    So you liquidate the account, put the money back into your own personal savings account ..

    Don't think you're allowed to do that legally.
  • kincaidterracekincaidterrace Registered User Posts: 3 New Member
    But, what if I do empty the account. Other than being sued by my grandson (which is not going to happen for reasons that are not relevant for purposes of this discussion), what is the penalty in the state of MD for breach of fiduciary responsibility.
  • dadx3dadx3 Registered User Posts: 1,559 Senior Member
    I'm not an attorney, but it seems to me that this would be theft. If the amount is over $1,000 it is a felony in Maryland with a penalty of 10 years or more (depending on the amount).
  • mrlydeckermrlydecker Registered User Posts: 1 New Member
    There may also be tax ramifications--the money is the child's but even if she consensually
    gives it to you, you have to claim it as income.
  • hammer1234hammer1234 Registered User Posts: 138 Junior Member
    If you are not sure then consult with an attorney...

    But from what I've read you can do just about anything with the money as long as it benefits the child. I would just make sure I documented what I spent it on in case of an audit.

    The main thing I go by is that money in UTMA accounts is not mine, it belongs to the kid(s).
This discussion has been closed.