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Using UTMA funds for downpayment
Posted by: Sonia, July 25, 2006 01:07AM
A distant relative gave each of our children a good amount of stock after his death, with my husband named as custodian. We would like to sell that stock and use the funds to purchase a house. (The children are very enthusiastic about this idea.) We still want the money to go to the children when they are of age, but I'm not sure how to do this. Should the property be purchased in their names? Any other suggestions? What are the legal and tax issues we need to consider? My oldest is 11 right now. I'll be talking to a mortgage agent later this week, but I'm trying to find some info on my own first.
Thanks,
Sonia

Re: Using UTMA funds for downpayment
Posted by: earlyfiler, July 25, 2006 01:36AM
Please define good amount!!!
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Re: Using UTMA funds for downpayment
Posted by: Sonia, July 25, 2006 01:49AM
Each of 5 children have 280 shares, current total stock value is about 70,000 for all 1400 shares.

Thanks,
Sonia

Re: Using UTMA funds for downpayment
Posted by: earlyfiler, July 25, 2006 04:36AM
Fact of life #1 is to turn the stock into cash involves selling the shares owned by each child, which may have tax consequences. Since all the kids are under 11, any capital gains on the sale of the stock will be taxed to them as investment income, and may in part wind up being taxed at your marginal rate because of the kiddie tax. If the shares were left to them recently, the chances are the basis for the shares could be fairly high and there may not be that much gain.

This begs the question of whether you can properly use the money of your kids, and it is their money, to buy/help pay for a home. Read all the posts on this BB on where the line is drawn on using money of the kids to better their lives. I assume whatever house you have in mind probably would better their lives. It may result in their living in a place with better schools, better environment, etc. You may justify using their money for this purpose. The UGMA police are not out there watching you. I am sure you will get various opinions from the usual gang of posters here, but I would not take the money from the kids for this purpose.

Trying to borrow from them is a legal morass, since if it is purchase money they should hold at least a purchase money mortgage on the house, even if it is subordinated to any commercial loan. Get good legal advice, not only on "should I" but on "how to" structure a deal like this. commern.

Re: Using UTMA funds for downpayment
Posted by: Sonia, July 25, 2006 05:52AM
earlyfiler,

Thank you for the response. It is certainly not our intention to take the money that belongs to the kids. And we're quite willing, if necessary, to sell the property when the time comes to liquidate the money. Is it possible for them to purchase the house with us? Obviously we'll be making the payments, but we would like it to be an investment for them--taking it out of stocks and putting it into real estate. Is that what you mean by borrowing from them? Is that too complex to be practical?

Thanks,
Sonia

Re: Using UTMA funds for downpayment
Posted by: DeeDee, July 25, 2006 06:12AM
Sonia,

Are you talking about buying a residence for your family to live in OR buying a house as an investment that you'll rent out?

Re: Using UTMA funds for downpayment
Posted by: Sonia, July 25, 2006 06:25AM
This would be a residence for us to live in.

Re: Using UTMA funds for downpayment
Posted by: UnforcedError, August 29, 2014 12:57AM
Hi Sonia

Were you able to find an answer to your question? I have exactly the same question I.e., if one can use funds in UTMA for a downpayment towards a house. We are moving to the new house because it has better schools, environment etc.

Early filer seemed to say that one may but I was not sure. Last sentence seemed to say that one can not.

Re: Using UTMA funds for downpayment
Posted by: Drewremedy, August 29, 2014 11:39AM
While there are no police as such on UTMA matters and in theory the custodian could invest in real estate on the child's behalf ...the mechanics of doing so in a manner which protects the children's standing by title and other things in the home or whatever remain daunting....the parents best of intentions may godown the drain if the marriage hits the rocks or other creditors are ahead of children as to secured interest in home.

Hey, if the children invest say 50,000 in the home in a perfected recorded note in FIRST position and the note is callable at majority and delivered at majority and pays a fair rate .....perhaps it's clean enough ???but I were there to protect kids interest as custodian should be, I,d insist on first position?

Re: Using UTMA funds for downpayment
Posted by: 47Percent, August 29, 2014 03:10PM
First thing you should do is find the cost basis of the shares and the tax implication based on kiddie tax rules. Then you can start planning how you can spend/invest all that money.

This is probably not the answer you want to hear.

I wouldn't do it and wouldn't advice that you do it. Drewremedy is right. It is fraught with problems and bending the intent of the law if not the letter of the law. If the original benefactor wanted you to buy a house for the kids, he would have given you the money.

My suggestion..

a)Start a savings fund earmarked for down payment
b) diligently put every penny you would spend on any and all expenses on behalf of the kids into that fund
c) take out the money from their UTMA account for the expenses instead
d) keep diligent records of all of the above

When the UTMA accounts hit $0, you would have all the money in your savings fund. Then you can do whatever you want with that money including buying a better house.

With 5 kids, that will happen soon enough and you will run through $70k pre-tax like knife through butter. (Just realized the original question was 8 years old.. so plz ignore the last line)

Re: Using UTMA funds for downpayment
Posted by: UnforcedError, August 29, 2014 03:37PM
Thank-you DrewRemedy and 47Percent for the responses. I should have added additional color for my situation. The UTMA money is what I contributed 3-4 years back. I can sell the shares and file taxes on their behalf so no real tax issues. I lost my job and my work area has disappeared so I don't have good chances of finding a job. I am working on a startup now. In addition, my wife has not worked for a long time and she has a handicap which will make it difficult for her to find work. As a result, banks wont give us a mortgage to buy the house. So we are looking at all sources of cash and using UTMA money to pay for a part of the payment buy a house is an option we are exploring. Unfortunately kids may not get good education if we don't move to an area with good school district. I hope that clarifies our specific situation and I was wondering if it would amend your thinking. I appreciate your thoughts.

Re: Using UTMA funds for downpayment
Posted by: jainen, August 29, 2014 04:46PM
UnforcedError Wrote:
>>kids may not get good education if we don't move to an area with good school district.<<

There is a vast amount of unknown in the word "may," but generally this sounds like self-serving rationalization to me. Obviously anything that helps a family member would have SOME benefit to a child. In my own (non-legal) opinion, UTMA funds should be used for the DIRECT benefit of the child, and the PRIMARY benefit should be for the child.

This question has been argued for decades. I recommend asking a local attorney to research how courts in the child's own state have answered it, and to review the language of the specific trust document.

Regardless of the law, I think it is unreasonable to risk all of a child's funds on a new home without "good chances of finding a job" to pay for the home.


Re: Using UTMA funds for downpayment
Posted by: UnforcedError, August 29, 2014 07:14PM
That statement does sound like self serving rationalization. Just because kids need to start school now so we have to move soon. They can always spend some time where we are and we can move to a place with better school district later. Also, we are using bulk of our money and thinking of using part of the UTMA funds for part of the purchase price. I will research legal databases and also look at legal language in the UTMA in New York. Thanks much for your thoughts and pointers.

Re: Using UTMA funds for downpayment
Posted by: triad, August 30, 2014 06:45PM
FWIW, the underwriters looking at the downpayment would shoot this down.

Underwriters look to see where downpayment money comes from. If the money suddenly appears in the bank statements, they will ask where it came from.

If they say it's a gift, the underwriter will ask for a gift letter and would refuse it when it was clear the custodian took the money for themselves.

If they say the children are buying 20% of the house, the underwriter should ask where the downpayment for the other 80% is. (Even if they allowed the children to own 20%, the underwriter is going to act like this is a loan and include the 20% as part of the debt ratio.)

Lastly, the parent can be sued by the children. Once you set up the UTMA/UGMA, the money was no longer yours.



Re: Using UTMA funds for downpayment
Posted by: Drewremedy, September 2, 2014 03:35PM
It does not matter if the source of the funds was you or Great Uncle Henry...the funds are now most likely an irrevocable completed gift to child. ( at least one state supreme to court has so opined) and your role as custodian is to protect the funds and use them properly upon the designated child.

If you can find a clean safe way to borrow the funds and pay prevailing rates on a secured perfected note etc ..so be it ...go for it

Unless you want to trigger a slew of taxes under the kiddie tax provisions, take care to,only trigger a small amount of income per child in any one year

Re: Using UTMA funds for downpayment
Posted by: Drewremedy, September 2, 2014 09:20PM
i don't fault your desire to,access funds or your goal,of better education...just the mechanics of doing so,are too grey for comfort.

if instead you use UTMA for expenditures directly upon children even clothes ..That is a lot cleaner.


Re: Using UTMA funds for downpayment
Posted by: UnforcedError, September 2, 2014 09:42PM
Thank you Drewremedy. It seems to me that using part of their UTMA money to buy a house is too complicated. I will use their money for their direct expenses like clothes, transport, classes, food, ski trip and lessons, food etc where the expense is directly attributable and stay away from expenses like buying a house where the benefit to them is indirect. Thanks everyone for their feedback.

Re: Using UTMA funds for downpayment
Posted by: Drewremedy, September 4, 2014 03:58PM
More power to you to seek better job options by creating your own ....but you may have some risks by trying to solve too many desires at same time with limited cash flow...and no back up.

To move to a new house may have big added costs , fees in there someplace.

I am not a fan of education being greener a few miles away in all cases....a rather marginal school district might well run some pretty decent upper level classes ..and a so,called outstanding school district can be pretty lousy if one is in wrong track.



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