Other Tax Questions
Questions and comments on other topics covered in Fairmark.com, such as UTMA accounts, and any tax questions that don't fit our other categories.
"Spending-Down" UTMA's & Timing of withdrawals questions
Posted by: DBSTrader2, December 17, 2008 05:22PM
Is there any website or other source I can reference in order to determine exactly what are legal avenues for me to "spend-down" a UTMA account's assets?

I have seen this option mentioned, but have yet to see SPECIFICS on what would qualify or not - - it seems to be a very gray area.

For example, do intramurel sports enrollments, summer camps, sports camps/clinics, educational-based travel with organizations like "People-to-People", etc count as legal expenditures? What about musical instruments, sports equipment, etc towards furthering their talents & potential future scholarships?

Furthermore, does the money to pay for those legal "spend-downs" have to be taken at the exact time of the payment, or can a "running-tab" be used & money taken out in one or multiple "lump-sums", so as to reduce tax implications of constant selling of stocks/funds?

My late father-in-law set each of my kids up with a UTMA & later transferred custodialship to me. This was before 529's. Since then, I've had the goal of getting out of the UTMA in favor of a 529 for college financial aid considerations, but have had to do so carefully due to the large appreciation in the UTMA and tax consequences of selling. The time is ripe right now with the recent downturn.

I've maintained a running list all along, rather than take money out in dribs & drabs and possibly incur larger tax burdens on the account - - with the thought that I could let it grow that much more that way, and worry about reimbursing later, vs constantly reducing balance & incurring taxes thru ill-timed sales. That's not wrong, is it?

With college just a few short years away, I'd like to make sure my older son is re-positioned into a 529 properly.

Any and all help would be extremely appreciated! Thanks!

an appropriate way to handle UTMA funds
Posted by: jainen, December 17, 2008 05:49PM
>>I've maintained a running list all along, rather than take money out in dribs & drabs <<

I don't think that's an appropriate way to handle UTMA funds. I don't have any problem with using the UTMA for those kinds of expenses, but that's not what happened. In my opinion, it is awkward to cover such costs indirectly by reimbursing yourself now for what you previously incurred as a matter of normal parental support. It would have been better to move some of the money into a checking account that could be used to meet the child's needs.

Re: "Spending-Down" UTMA's & Timing of withdrawals questions
Posted by: Andy007, December 17, 2008 06:35PM
DBS: I am doing exactly as you describe. I have documented the actual costs for my child's activity and kept a paper receipt for each payment. I keep an Excel spreadsheet with a running total of these costs, along with the periodic movement of money from the UGMA account to my checking account.

Sometimes I am moving the money from the UGMA after the fact, sometimes I am moving it before the fact. Bottom line is that the funds are being spent for appropriate activities (same as the examples you cite) and I can document that.

I also agree that moving money in small drabs is silly. Not only can you avoid the hassle of constant movement, but you can time capital gains (to a reasonable extent) by moving the money to your checking account in one year vs the other. Personally, I wouldn't wait 18 years to reimburse myself for the costs, but I see no need to keep the money separate.

If there is a legal requirement for the spending to come directly from the UGMA account, I would love to know about it.

Best wishes.

Re: "Spending-Down" UTMA's & Timing of withdrawals questions
Posted by: DBSTrader2, December 17, 2008 07:31PM
Thanks for the responses so far!

Looking back, I'd have done differently, similar to how jainen described. Unfortunately, back when they were opened for me, the current 529's were not available & when profits "exploded" by the time we started making expenditures, we faced huge Cap gains expenses under the "kiddie tax" if sold by then.

But just as they tell you how money grows over time by compounding, I figured I'd let my son's account maximize vs my own finances by staying in there & keeping the list, rather than take out in dribs & drabs & make his account vulnerable to principal reduction & taxes, on top of any bad market timing.

As long as I had the list & receipts, I figured I had all the necessary documentation.

And, as I said, the legalese is SO very broad and subject to interpretation.............

Which brings me back to one of my original questions.... for those of you who either have kept a list (like Andy007) or have knowledge in that area, what items have you INCLUDED and EXCLUDED as valid for "Spend-down"?

Re: "Spending-Down" UTMA's & Timing of withdrawals questions
Posted by: Bill Brown, December 17, 2008 07:50PM
IF you want 529's for the kids you can use their UTMA money to establish 529s.

-- Hawk

legalities
Posted by: jainen, December 17, 2008 08:12PM
>>a legal requirement for the spending to come directly from the UGMA<<

To prevail on legalities, it is best to have a nice clean paper trail. You keep a spreadsheet and all, but that's just tracking what you spend on your own family budget. It doesn't prove the child owes you money. When it gets right down to it regardless of your reasons your paper trail shows that you took the money from the child and gave it to yourself. I called that awkward, not illegal.


Re: legalities
Posted by: DBSTrader2, December 17, 2008 09:06PM
If I entered into the spreadsheet a deduction, for example, for Space Camp in March 03 & then took out exactly that amount in March 03, there's obviously a better 1-to-1 relationship than if I still entered it on the same date, kept a running count of all the money "owed/expended", and took out exactly the running total of all "open items" at that time. I agree. But both "documents" as part of what was withdrawn (whenever that was), and neither actually "proves" the child "owes" the money.

Ideally, I'd have opted for the former, but I did the latter, for what I thought were good reasons then. But both ways of handling technically account for what is "owed", as long as what the money is withdrawn for fits the definition of what can be deducted for.

But WHO actually would go and look into WHAT was taken WHEN to make any kind of ruling? WHO would get involved under what circumstances to say definitively to me that I did it right or wrong, or right, but not the most ideal way? That's what appears to be lacking in definition on UTMA's, and what I am desperately looking to find to make sure I do nothing illegal. After all, we plan on giving it all right back to him in the form of a 529 when all is said and done............

thx again for all responses!

set your mind at ease
Posted by: jainen, December 17, 2008 10:44PM
>>I am desperately looking to find to make sure I do nothing illegal<<

No need to get desperate (or IS there?) UTMA's generally are not monitored or regulated in any comprehensive way. Presumably your sense of moral obligation to your child and your own parent's needs and wishes will keep you straight. If you are worried about anything specific, a half hour with a lawyer who specializes in trusts & estates will set your mind at ease.

Re: legalities
Posted by: Andy007, December 18, 2008 03:42AM
Hi DBS: the article linked here is written by an estate and trust lawyer in Colorado:

[www.rothgerber.com]

She states the following:

"On the basis of existing authority, a
Colorado custodian reasonably could use
UTMA funds to pay all private primary
and secondary school and all post-secondary
educational expenses for a Colorado
minor, regardless of the parentís financial
circumstances. Using UTMA assets to
fund travel and extracurricular activities
for the minor also would be an acceptable
use of the custodial funds. Purchasing a
vehicle for the minor who has attained
driving age is permissible, although titling
could be administratively difficult to
maintain in custodial form. Additionally,
payment of car insurance, maintenance,
and repairs with custodial funds should
be permitted. The UTMA may allow a
custodian to reimburse past expenditures
made for the minor by others and take
fees for custodial services to accelerate asset
removal."

Personally, I have included very similar items in my tracking of spending for my son's non-"support" items. For example, tennis camp, tennis lessons, tennis equipment (he is on JV tennis at school), driving school, summer school classes, a $400 high school ring, a car, auto insurance and a trip to Europe.

The author of the article refers to the Colorado law on reimbursements, which states, "A custodian is entitled to reimbursement from custodial property for reasonable expenses incurred in the performance of the custodian's duties." While I don't live in Colorado, I assume other states have similar language.


Be careful in how you "move" the funds from the UTMA to the 529. I would reimburse yourself for non-support spending by moving the money from the UTMA to your checking account. I would - separately - write a check from your checking account to the 529 account. If you move funds directly from the UTMA to the 529, I believe the 529 account would take the legal aspects of the UTMA (belonging to the minor upon reaching the key age).

Best wishes.




a much better way
Posted by: jainen, December 18, 2008 04:18AM
>>reasonable expenses incurred in the performance of the custodian's duties<<

Why quote something that doesn't support your position? We have not been talking about reasonable fees for performing custodial duties, nor "past expenditures made for the minor by others." Others is not the same as oneself.

Your own assumption that "other states have similar language" is specifically contradicted by your author, who warns against relying on Colorado law if the minor so much as visits another state. Even in Colorado, the case history is limited to a single trial (which ruled AGAINST the custodian).

I'm not saying you can't do it this way. I just think there is a much better way.

Re: a much better way
Posted by: DBSTrader2, December 18, 2008 04:30AM
jainen:

can you elaborate on your "much better way"? I'm all ears. thx!

As I said
Posted by: jainen, December 18, 2008 05:49AM
>>"much better way"<<

As I said in my first post, "It would have been better to move some of the money into a checking account that could be used to meet the child's needs."

You can still do this. Liquidate the investments just like you wanted to at this time, but put the proceeds in a checking account still within the UTMA. Use that to pay expenses for the benefit of the child from now on.

I don't have a problem with "support" items, at least in accounting terms. Some people would object to substituting a child's funds for a parent's obligation, and I noticed Andy's article cites a case in my state that held a parent liable for doing so. If you use the money to provide wonderful childhood experiences that could not be available otherwise, that's fine.

My concern is for the record to be quite clear--funds were in fact used ONLY for the child's benefit. In my opinion, a canceled check endorsed by a third party is better than a self-prepared and self-serving "running list."


Re: As I said
Posted by: Drewremedy, December 18, 2008 01:21PM
If you are seeking to reduce the childs asset base for financial aid reasons --that may or may not work--and I suggest you run some trial calculation on one of the on line models.

To some extent unless you fall into one of the in favor affirmative action categories you are likely to wind up with more loan based aid and less grant aid --so don't move mountains for limited payoff.

But if it appears to work, then consider...

1. You can make a UTMA to UTMA/529 shift with no limitations unless you top out of the plan cap which is probably in 250K range---you do however need to fund plan with case so to generate case might trigger some income and kiddie tax issues.

2. You can as custodian deliver some of the UTMA funds directly to child early-(most likley if your state follows the 'uniform model' ) --now how hard you can sit there and watch him/her make the "right" next decision is not a good question to ask, sometimes its best to just get stuff done..

Note--there are massive student loan forgivness programs out there --so there may be other ways to get to end result

Re: "Spending-Down" UTMA's & Timing of withdrawals questions
Posted by: earlyfiler, December 18, 2008 02:54PM
I would like to add there is no one website that "exactly" answers anything in this area, since all these guys are creatures of state "uniform" laws that are never uniform. You will find Sasquatch first.

I think we all would agree that "safe UTMA practice #1" is set up a custodial checking account and directly pay "appropriate" spend down expenses out of that account. Reimbursements, even with good reciepts and spread sheets, invariably lag reality, and how long is too long? It's just like prunes, three too few, five too many.

Easier said than done, however. If you have 3 kiddies with UTMA's then the custodian is going to have to lug around 3 checkbooks. And only the custodian can sign the checks, so nix the idea of sending non-custodian Dad out with little Sally to shop around for the Ipod of her dreams, unless Mom gives Dad a signed, blank check. This is never a good idea, unless you are the government dealing with, say, Citibank or AIG.


My parting comment is for at least 15 years my wife has been dealing with UTMA's for our three sons, as well as with three Crummey Trusts that were set up once her very generous parents figured out they could impose far more restrictions on their gifts to my sone by using a Crummey.

Re: "Spending-Down" UTMA's & Timing of withdrawals questions
Posted by: DBSTrader2, December 18, 2008 04:18PM
OK. Several things.......

First, I don't have just a spreadsheet. In most cases I have or can get receipts/invoices, etc. I just never physically took the money out till now.

Second, having taken the money out, if like an IRA transfer, etc, do I still have 30 days to put it back under a "UTMA 529" in its entirety, if I decide I don't want to go thru the "hassle" or grey area of my plan to reimburse?

If I go the "529 UTMA" route, which I guess would be fine with me, since we were going to open up a 529 anyway with the reimbursement "proceeds", does that now become "parental assets" when calculations are made for college financial aid calculations & "EFC"?

Overall, my goal was not to reduce his money, but just shift it away from being counted as his assets for financial aid.

Thx for add'l help!!

Re: "Spending-Down" UTMA's & Timing of withdrawals questions
Posted by: Andy007, December 18, 2008 04:19PM
earlyfiler Wrote:
-------------------------------------------------------
>
>
> Easier said than done, however. If you have 3
> kiddies with UTMA's then the custodian is going
> to have to lug around 3 checkbooks. And only the
> custodian can sign the checks, so nix the idea of
> sending non-custodian Dad out with little Sally to
> shop around for the Ipod of her dreams, unless Mom
> gives Dad a signed, blank check. This is never a
> good idea, unless you are the government dealing
> with, say, Citibank or AIG.
>
>
>

This is exactly what happens in real life. You want to buy an airline ticket for your son to fly to summer camp. You are online with Delta or Continental.....how do you use a check? You want to get a credit card in your minor's name? Nahhhh. You are often surprised by these requests....you are at school and your daughter's soccer team (or band) requires uniforms or equipment...but you don't have the checkbook with you.

I think we all agree with "Safe Practice #1", but that doesn't balance cost and benefit very well. The "cost" of using Safe Practice #2 is as close to zero as you can get (the risk of losing the deduction is virtually nil). The "benefits" of using Safe Practice #2 are the ability to deduct a whole lot more legitimate expenses by not restricting yourself.

Hope this helps.

to summarize
Posted by: jainen, December 18, 2008 05:38PM
>>Easier said than done<<

So to summarize: It's just too darn much trouble to worry about commingling custodial funds. As long as you write it down you can always fix it later. Amen.


Re: "Spending-Down" UTMA's & Timing of withdrawals questions
Posted by: Drewremedy, December 18, 2008 06:33PM
I'm aware of no law that actually says you can convert UTMA funds to your own account then put them back into UTMA inside of 30 days or whatever--the practical answer would seem to be that nobody is going to enforce anything and you would seem to lack criminal intent if yo merely do it..

Problem is when a parent or custodian withdraws funds but "forgets" to replace them or is unable to do so for any number of reasons --how does kid actually get his money-or even know his account is short-??

Re: an appropriate way to handle UTMA funds
Posted by: Kenny2300, December 18, 2008 11:24PM
I had an utma account established in my name in 1992. As I turned 18 I contacted my custodian to ask for the money for college. The custodian stated that she did not have any of the money and to go to my grandfather (Note my grandfather and my grandmother (by marriage only) were divorced in 1999). I checked with the financial institution who handled the account since it was opened. They said that the custodian cashed out the account ($8,000) in 2001. As I said she now denies any existence of the account. I know for a fact that my grandfather did not receive any transfer of the money. She refuses to have any added contact. I live in Florida, the account was opened in Maryland and she lives in Pa. Where do I have to go to court to get the money and what kind of lawyer (if any) do I need.

That's the fun
Posted by: jainen, December 18, 2008 11:36PM
>>the practical answer would seem to be that nobody is going to enforce anything<<

That's the fundamental truth here, isn't it? Legality, morality, banality -- you are going to get away with it anyway, so do whatever you want.



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