Our daughter is now 17 and a high school junior. She will start college in 2004. We have been saving for her in an UGMA since she was an infant, and now have proudly accumulated over $40K for her.
We became painfully aware of the financial aid problem with UGMAs after going through college selection for her older sister two years ago. This time we set out to research all the legal options available to us and looked long and hard at the 529 plans available throughout the country. We were convinced we could 'work the system'.
We reviewed the 529 forms for Colorado (our home state) and Nebraska very carefully. The Colorado 529 form requires that the minor be named as the owner when transferring from an UGMA, so that did not seem to help. The Nebraska form didn't have this requirement, so we decided to go ahead and liquidate the UGMA to move it to Nebraska. We were disappointed to see that some of her securities sold for less than statement value, so there was a bit of a loss in this transaction. (We also don't know if there will be another sting when we get our year end 1099. Even though we've been paying taxes for all these years, some of these sudden liquidations may have produced some new taxable gains!)
The big disappointment came when we set out to complete the Nebraska application. First of all, we would have been required to complete their special form for UGMA transfers, which specified that the owner cannot be changed. No problem after looking at the fine print. While the child is a minor, the custodian becomes the account owner.
The real problem comes with the UTMA/UGMA Notification Form, which requires us to inform Nebraska when our child reaches the age of majority, at which time she becomes the owner of the account. Our daughter will turn 18 in November of 2003, just before we have to complete her college applications, and will therefore have to be named as the owner. If instead she had turned 18 the following spring, we would have had a perfectly legal way out of our UGMA problem.
We looked deeply at available information on age of majority in Colorado and cannot locate this. Mostly you see that 'in most states' it is 18, but don't know this for sure. If anyone on this board knows, please let us know.
Mainly, we're looking for good advice on what to do now with the $40,000 he have sitting in our checking account, which is keeping us both awake nights. Here are some ideas:
- Put it back into her UGMA account, which is still open with $2 in it. We can then at least cut our losses by putting it mostly into an interest bearing investment.
- Go ahead with the Nebraska account and conveniently forget to inform them when she becomes 18. This is a big sleep-loser.
- Open a separate new account in our names and spend it only for her college. This does not circumvent the UGMA rules because the funds will ultimately be spent only for her benefit.
- Open a Colorado 529. This doesn't appeal because Colorado's investment options are not as good, and we would not receive a tax credit with UGMA transfer money anyway.
In doing all of this, we are aware of what many have said in their postings: it is very unlikely that any auditing governmental agency will ever learn about any of this. The bigger concern is that one of the academic institutions will want to take a closer look at things in the future, and disqualify our daughter for any form of financial aid.
This has been a painful lesson, and we hope that others can learn from it. However, there still may be opportunities out there, so we are interested in knowing your thoughts.