Hey guys, there are lots of things that are technically illegal but never pursued, especially if they are victimless. In a sense they would be a waste of public enforcement resources. And some fall into cracks between state and federal issues and some don't fit because the underlying laws don't mesh.
Lets assume one liquidates a UTMA and pays any taxes due. No problem so far?
Now lets assume the custodian reinvests the cash proceeds in a 529 with the prior custodian designated as owner and the child designated as beneficiary. Legal hairsplitting aside, the funds are still there for the childs use. (And in many respects the funds are safer from being spent on a new Harley or whatever because of the built in disincentive to spend them for anything but higher education.)
If the funds are expended upon the child for higher education we wind up with.
- The child gets full benefit of the original gift.
- The child gets greater benefit due to the tax exempt status of the income.
- In some cases the child avoids the prejudical effext of a UTMA on financial aid.
- The funds may be safer from the creditors of a young person who makes some bad decisions
So the child comes out ahead. From the viewpoint of the child --and his or her abuse--how much time and resources can society spend to enforce what some would see as the correct decision of the custodian to maximize both benefits and safety of the childs gift-which he got in full.
And since the beneficiary of a 529 is in possession of a completed gift for transfer tax purposes then with a bit of convoluted thinking if person A had a UTMA and they wind up with being a beneficiary of a 529 then from a tax standpoint there is nothing new--no new gift. One could debate that for a brief instant the full control passed back to the custodian, but for events of $11K or less per beneficiary per year thats a non event??
Now granted, the "owner" could convert the funds to personal use or change the beneficiary to the kids younger sister who has yet to go to college. But such improper uses of gifts happen all the time and are a matter for state enforcement under the UTMA laws of that state. I would agree that at the instant the plan owner made a nonqualified distribution to himself or designated a new beneficiary (without consent of prior beneficiary of age)that he or she has crossed the line. But until that point its victimess.
I am not saying its right. I'm merely suggesting that for modest sums the UTMA police are unlikely to pull you out of bed at night.
From the child's standpoint if at 21 or whatever they really do want to blow it with a Harley trip to Pakistan they have every right they previously had to demand the "custodian" deliver the funds. It may be a tad inconvenient, but it most certainly can be delivered.
And if the "custodian" uponpassing conveys ownership to the beneficiary the loop is closed.
The alternative of course is to spend down the UTMA ASAP on whatever things are inside the law and to replace them with new gifts held in 529 format owned other than by the child.
There is one major area where this might fall apart. A UTMA/529 is perhaps bombproof not only to creditors but to spouses of the donors. In todays world of his,her and our kids, a parent who hides a large sum in a 529 designated for her kids may find this unwrapped if the marriage falls apart. A UTMA is completed by all standards absent fraud. And a 529/UTMA may be bullet proof.
So in that context if your kid is unlikely to get any grant aid and you have no reason to suspect the kid will waste the funds upon age 21 or so then a 529/UTMA may well be a rock solid solution and why run the risks of converting ownership back to the "custodian."
And if you marriage has any downsides, as 50% do, then funds locked up that way for kids education are less likely to fall into parental debates. LIke if its your secound marriage I'd be awfully careful to segregrate educational funds for separate kids.
You would not be the first parent who strong armed a kid into leaving assets from a UTMA in place once of age.