<p>Oldest son is a 2011 HS grad and applying to various Tier 1 schools. College funds are set aside in both an UTMA & CESA; unfortunately, with regards to potential federal financial aid the majority is still in the UTMA. Just now learning that UTMA assets are assessed at a 20% contribution rate vs. CESA assets @ 5.6% per the FAFSA. We have three other children, all of whom have their own UTMAs & CESAs. We are behind the curve savings-wise for these three due to the downturn in the economy the past few years. Oldest is also a NMSC semi-finalist and may possibly be able to take advantage of significant aid via a NMSC finalist award (should it come to pass in February), in which case we would want to reallocate some of his college savings (with his cosent) to his siblings’ college funds.
Question - can our oldest ‘gift’ assets from his UTMA account to his three siblings prior to submitting the FAFSA next month without violating any FAFSA rules/guidelines? Legally, I know he can gift up to $13K/person/year without any tax consequences but have not been able to find any specific info as to whether or not any inter-family gifting between siblings - and the timing thereof - is a financial aid application violation of any sorts in terms of trying to legally shelter assets within the FAFSA application process. On the flip side, am I correct in my assumption that such gifting to siblings may not signifcantly change the finanical aid equation with respect to the CSS/financial aid profile as his siblings’ assets will need to be listed on the CSS? Note: oldest is applying to some schools which require the FAFSA only and others that also require the CSS profile as well.
Any comments or specific information as to where to learn more on the subject would be greatly appreciated.</p>
<p>What is a CESA?</p>
<p>If he can convert the UTMA into a UTMA 529 account then it would be reported as a parent asset which would be assessed at the 5.6% rate.</p>
<p>I’m not an expert at all in this area but I am not sure that it is that easy or legitimate to “gift” money from his account to his siblings. I was under the impression that UTMA accounts are irrevocable gifts to the child and that the money can only be spent on things that benefit the child but are not parental obligations. Transferring thousands to siblings accounts does not seem to me to meet the legal and IRS requirements of a UTMA. Make sure you check with both a tax accountant and/or someone who specializes in UTMAs.</p>
<p>This isn’t so much a FAFSA issue as it is an IRS one. Funds in a UTMA are to be spent for the benefit of the child. It’s hard to justify to the IRS that child #1’s money being moved to child #2’s UTMA is money spent for the benefit of child #1. In an extreme case, child #1 could sue the custodian and claim that the money wasn’t spent for his/her benefit.</p>
<p>You’re not required to leave an UTMA account untouched until the child gains control. The custodian can spend money from the account for the benefit of the child. Naturally you don’t want to spend it frivolously or improperly. Most people are already spending money on their children, however. You may be able to spend those same dollars from the UTMA account. Does child 1 need a car? A computer? Another big-ticket item? You can purchase that with funds from the UTMA. If you don’t step over the line, this is a completely legal way to shift money out of an UTMA account.</p>
<p>Since you say the UTMA funds are for college, then the simple thing is to transfer them to a child-owned 529. This will immediately reduce the impact of the child’s savings for FAFSA, from 20% to 5.6%. All 529s, whether owned by the parent or the child, are assessed at the parent rate.</p>
<p>CESA - Coverdell Education Savings Account, also known as Coverdell ESAs or ESA for short. Maximum of $2K/year contribution (tax free) up to the age of 18. Funds typically must be used towards a kid’s education, both K-12 &/or college. Definitely the way to save for college with regards to federal financial aid vs. saving in an UTMA/UGMA. You can also rename beneficiaries on CESAs, ie. transfer funds &/or re-designate account to other family members as long as the funds are used towards education related costs. </p>
<p>Will look into a 529 conversion. Really had not explored them much once we opened the kids’ CESAs after the UTMAs.</p>
<p>From the little I know with regards to taxes and UTMAs, I don’t beileve there are any legal issues whatsoever with our oldest gifting money to his siblings. Gift amounts of $13K or less per person per year are allowed without any applicable gift tax per current tax law. The money is his to do with what he wishes, albeit held in trust on his behalf until the age of 21 in our state (ID). I am sure there WOULD, however, be serious ramifications if it was gifted back to us as parents as then the IRS could rightfully accuse one of sheltering assets under the kids’ names in order to take advantage of lower tax brackets for the children. The question I am trying to answer is whether or not the timing of any such gift would become an issue with respect to the FAFSA submittal process. Not looking to skirt any financial aid laws, but do want to work within the sytem to our advantage as best we can.</p>
<p>vballmom - looks like you mentioned an important qualifier: “funds must be spent for the benefit of the child”. Will look into the 529 plan rollover.
Thanks for the feedback.</p>
<p>My sons’ grandparents set up Coverdells for the boys. The fees were beyond ridiculous. Eventually the accounts were liquidated and transferred to 529s.</p>
<p>There’s no practical limit to the amount of money that can be contributed to a 529 (over $200K if I remember correctly).</p>
<p>It’s possible that you’re concerned about over-funding S1’s college (Coverdell & 529) accounts if he’s eligible for a lot of merit aid. That’s a legitimate concern.</p>
<p>I do think warning bells will go off if the account existed for some time and was removed from the child’s name shortly before applying for student financial aid. Especially if the account generates large dividends that appear on the student’s taxes, or will generate a large capital gain if assets are sold before being moved from child #1 to child #2. A financial aid audit will ask for the source of those dividends or capital gains. If they’re no longer in child #1’s account, it will be hard for you to explain what the source of the income was.</p>
<p>Yes, concerned with over-funding #1 especially to the exclusion of the other three kids. Unfortunately, currently self-un-employed in the construction industry, which isn’t showing many signs of life these days so keeping up wth college funding has become difficult.</p>
<p>Also somewhat concerned with the possibility of limited 529 investment options given the recent market volatility the past few years, and the trade-off between having funds available for future transportation (vehicle) vs. sheltering assets with regards to financial aid assets. On that end, I guess that’s a good problem to have.</p>
<p>You can spend down the UTMA account on things like application fees, college visit trips, a computer for school, and so forth. To the extent that those things are currently coming out of your general household funds, you can free up some funds to save for the younger kids.</p>
<p>I don’t think you should assume that there are no legal issues if you, as custodian, transfer your son’s money to the ownership of your other kids. I thought the rules were pretty clear, as others above have said - the custodian has to spend the money for the child’s own benefit. Legally, your son can’t make a decision to give his money to his siblings until he is of age and controls the money himself. IANAL, but that’s how thought it worked. Best to check it out!</p>
<p>I thought you were calling yourself anal. Then I figured it out.</p>
<p>@swimcatsmom: Having also never seen that web shorthand “IANAL” before, it took me about 15 seconds to reason it out from the context. I didn’t see it as you did initially, but your comment had me laughing!</p>
<p>Somehow, it doesn’t seem karmically right that the “N” negates it from being a true abbreviated description of the often obfuscating legal profession, so maybe it should instead stand for “I Am Normally A Lawyer,” LOL!</p>
<p>(p.s.- BTW, I have always enjoyed your many numerous comments spread among the many, many various threads here. I have learned a lot, and my kids have benefitted from the knowledge and wisdom you’ve generously shared here. Thanks, scm!)</p>