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Paying for past custodial expenses
Posted by: scotttiger, November 30, 2015 09:05PM
Hi,

We racked up some expenses for our 2 children over the years (camp, cell phones, private school tuition) and put them on zero percent credit cards with either a year to 2-year time until pay-off. (Why pass up being given a float of free money?).

It is now time to pay those credit cards off; are we allowed to use custodial moneys to pay off those expenses -- even though they happened a year or two ago?

Alternatively, we have Coverdell IRA's; are we required to tap those first for tuition that occurred the first half of 2015, or can we tap the custodial accounts first?

Re: Paying for past custodial expenses
Posted by: Kaye Thomas, December 2, 2015 01:08PM
I'm not aware of any clear guidance on the issue of when it's permissible to use custodial accounts to reimburse expenditures previously made on behalf of children. As a matter of general principle, it seems to me the question would turn on whether it's reasonable to infer that an intent to obtain reimbursement existed at the time of the expenditure. If the intent is to use custodial funds for an expenditure, but as a matter of convenience you use other funds and then take reimbursement from the account, you are using the account for the benefit of the child. On the other hand, if you've spent money in the past without such intent, and later decide it would be nice to get money out of the custodial account and want to use this past expenditure as a way to do that, you aren't using the account for the benefit of the child. Typically, the easiest way to justify the notion that reimbursement was intended would be to obtain reimbursement promptly after the expenditure. You present a situation where it may be reasonable to suppose that there was a reason to delay reimbursement even if it was intended at the time of the expenditure, to take advantage of interest-free borrowing and permit the accounts to produce more investment earnings during that period. I can't say it's clearly proper or clearly improper, but you would have an argument in support of taking reimbursement.

There is no requirement to tap a Coverdell first for educational expenses. Note that if the Coverdell doesn't end up being used for educational expenses, you lose the benefit of making tax-free withdrawals.

Kaye Thomas
Fairmark.com

Re: Paying for past custodial expenses
Posted by: scotttiger, December 2, 2015 04:02PM
Thank you, Kaye, for the clear and comprehensive discussion.

Re: Paying for past custodial expenses
Posted by: Drewremedy, December 6, 2015 09:10PM
There are no UTMA police as such...and assuming younare not playing some social reallocation of who pays what, there may simply never be an occassion to inquire about the deferred reimbursement ..and if there is..you seem to have a good reason....

Re: Paying for past custodial expenses
Posted by: Drewremedy, December 7, 2015 01:07PM
If you are seeking to spend away or reposition the UTMA funds so as to get more favorable financial aid math under FAFSA there are probably much more aggressive ways to do it, inside the law.

Re: Paying for past custodial expenses
Posted by: jainen, December 7, 2015 04:24PM
scotttiger Wrote:
>>We racked up some expenses for our 2 children over the years (camp, cell phones, private school tuition) and put them on zero percent credit cards<<

If these cards were used exclusively for the benefit of each child, there might be a good argument that it was a prudent action to optimize custodial funds. It would be weaker if the children's expenses were co-mingled with other family debt.

There's not much oversight in such matters; honor system is the rule. Original post doesn't identify the type of "custodial moneys" in question, but the account paperwork may have some guidance on how funds can be used. The basic point is that the money belongs to the children themselves. The credit card debt is personal to the parent, so in my opinion custodial funds should be used for more direct expenses. I'm sure there are plenty.




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