Moving funds out of uniform gifts to minor account

[user_9347]

I've been saving for college since he was born and at the advice of a financial planner, put the money into state sponsored zero coupon bonds and mutual fund accounts under the uniform gift to minor. The money has grown over the years which is great, but now I hear on Bob Brinker's Money Talk Radio program on Sat, Jan.28,06 that this will count as 35% (vs. 5% for 529 Plans)when applying for student aid. 529 Plans were ever invented when I started saving 16 years ago. He's a senior in high school now and applying to colleges, but how can I restructure the savings so as not to be penalized by the money I saved?

[rsinj]

Since he's a senior in high school, and you're going to be filling out that FAFSA any day now, my guess is that it's too late to do anything - the UGMA will show and will be counted at 35% against your need.

On the other hand, you shouldn't look at it as being penalized. Yes, had you not saved the money you might be eligible for more aid (if you even are eligible), but, then again, you wouldn't have all the money saved in the UGMA. It's not being counted dollar for dollar against your need, so, if anything, think of it that you have all the money in the UGMA, and they are only looking at it as 35% being the required contribution (when it could be at 100%).

It's the difference of being the child's asset vs. the parents asset. Additionally, the UGMA is not necessarily a college savings vehicle - it is a generic irrevocable trust. You could have made withdrawals from it for the past 16 years for anything that your son needed. Likewise, when he reaches 18 (or 21), whether the money has been used up or not, he then owns it all, has control and can do whatever he wants with it. If you think that you would get some (or more) financial aid if the UGMA were not there, then just apply as much of it as you can for the first year of college (tuition, room and board, books, travel, everything your son needs) - then it won't be there (or much less will be there) when you fill out the FAFSA next year. Maybe someone else could comment if that would or would not work.

I don't know what it asks for on the FAFSA, but, I'd have to guess that they are going to go by Dec 31, 2005 numbers (or possibly earlier). You can't hide/use the money at this point to have it not show up.

[This message has been edited by rsinj (edited January 28, 2006).]

[itstoomuch]

If the investments have done well, what is there to complain about? If the UGMA has some cash, near cash, EE Bonds, or losing investments- the $ may then be invested in a 529 to reposition and shelter further gains, interest and dividends. If the UGTMA is throwing off dividends and/or cap gains, then I really wouldn't worry about them because the taxation is fairly small. I'd rather have gains and pay taxes rather than loses/small gains and pay no taxes.

You may want to consider repositioning the UGMAs to protect the current values or limit risk exposure. A 9/11 occurrence and the market cycle was not kind to us when we needed the funds for college. We have recovered but the stress level was fairly high from 2001-to early 2005.

The financial aid notion is a myth for most students and parents. Real FA is given to those students that the school wants, regardless of financial need.

I have said this before: It is better to have the $$$ to pay for college than to be at the mercy of the college to determine the FA and ultimately the acceptance/attendence to the school.

We are and soon to be were, in the same position as you deem youself to be. We have no regrets and probably would have done very little differently even with Coverdells and 529's. We started in 1985.

[This message has been edited by itstoomuch (edited January 29, 2006).]

[itstoomuch]

Anon: Dr Jag:

So what if son is on the hook for 35% if you can minimize the need for FA, would want to have the sure thing and not a wish?

My Arguments:
1) Most FA will be given in terms of loans; If you have a good amount in the UGTMA, the loan will likely be Unsubsidized Stafford and PLUS loans. As for infamous merit aid - maybe you will get some, maybe not, and if you do, HOW MUCH and what are the Conditions?

2) How do spend down UGTMA in an highly appreciated account without incurring a substantial tax load, foregoing taxfree dividends and do that without revealing a spend down in either FAFSA or CollegeProfile. Finally How NOT to spoil kid.

3) So if you have successfully spenddown the UGTMA for child's benefit. Child now eligible for FA. Child is smart and desirable and wins $20,000 of merit to a $40,000/yr school. YOU or CHILD is now have to come up with an additional $20K...every year.

1. Strings attached to MA. Must maintain 3.0 GPA. He's in a tough major at a highly competitive school with like kids. Pulls down a very respectable 2.9 GPA freshman year. Son does better in last 3 years and pulls GPA up above 3.0. But MA condition states never below 3.0. You-Son must come up with $40,000 per year without inflation factors for the remainder of school. You and son's obligation for the 4 years is $140,000. Suppose that GPA is good through all years and MA is maintained - You are still obligated to $80,000. Too bad you spend down UGMA to get merit aid.

You can run all types of scenarios. I believe you will find that having the money in UGTMA, 529's, Coverdells, Bonds, is a whole lot better than doing a spend down.

PS: suppose you do a spend down in the UGTMA's. Son decides your spending habits as pre-graduation gifts to son, a new car and 3 month trip to Europe, was not the wisest of choices because he is now saddled with Stafford Loans of $23,000 at 6.5%. He decides to sue.

Have son do a calculator work with paper and pencil. Try different scenarios to discover if B. Brinker is correct or just simplistic.

[This message has been edited by itstoomuch (edited January 30, 2006).]

[This message has been edited by itstoomuch (edited January 30, 2006).]

[itstoomuch]

Dr Jag's son is a senior in HS. For him to do a spend down is probably not in Dr Jag's or son's interest. It is too late for Dr Jag to make major adjustments to his son's college program. He should be rather pleased that his plan is successful after 16 years of effort.

Even if Dr Jag's son is freshman in HS and as many 10k's of bucks, The alternative's are not too promising to move the $ to 529's. Some $ to 529 must be carefully timed and planned, or new money into 529 to manage any future gains and tax credits.

Dr. Jag's supposedly problem is/was exactly the same as ours. Some careful movement into 529's from UGTMA's and bonds, manage the tax liability, and a judicious use of PLUS and Stafford loans to manage cashflow and hedge to the markets.

Since the UGTMA's are throwing off interest and dividends, gains and losses. Dr. Jag should run different scenarios on his tax program- at the very minimum to verify his "tax" accountants numbers. A simple spreadsheet or accounting program (Quicken or Money) will aid in [i]what if[/i] combinations.

I never trust anybody with my money, even myself!

Use your FP/FA well and hard. Most accountants that I've used are idiots. You would think that accountants understand future-value of money and labor--they don't. They are historians and hence pessimists.

Lesson: Keep inquiring and make your own tests to Bob Brinker's hypothesis.

[This message has been edited by itstoomuch (edited January 30, 2006).]

[This message has been edited by itstoomuch (edited January 30, 2006).]

[itstoomuch]

Have jr buy the car from his UGTMA and then you replace the funds into a parent's account. Where do you think $25,000 is coming from the parents? Do think that my broker would let an 18 year old boy, take $25,000 from his UGTMA without the custodian's consent? And is there a possibility that the son may later sue the custodian for derelict of fudiciary duty for allowing purchase of car rather than further investment that was professed to the child as college funds and for his future use? Can you factor into the program that perhaps the parents will not or later unable to setup a dedicated parent account for child? Chances we all must take.

As for Hooker of the Month, My son needs the experience. but then again, at some schools the ladies are pretty easy.

I strongly disagree in most of your thinking in not using more UGTMA's.

I do find it challenging to debate this issue as I am still working out different scenarios to the UGTMA's, student loans, and taxes. We may be looking at another two years because of grad school. that's another thread.

[rsinj]

"Does anyone see some positive reasons for the use of UTMA/UGMA other than a few years of tax savings."

How about that it is the beneficiary's money no matter what happens? This is the case whether we are looking at the UTMA/UGMA in general, or as an alternative to the 529.

Because the 529, and other investment vehicles may be under the control and ownership of others, those funds can be taken from the child, given to others, or squandered for whatever purpose the owner sees fit. In the UTMA/UGMA, come hell or high water, that money is the child's.

All too frequently, I see people blasting the UTMA/UGMA as a bad thing because the child can squander the money away when they're 18. Like any other legal/financial instrument, the UTMA/UGMA has a purpose. If you are not looking for the end result of what the vehicle does, then you don't set it up - but again, don't go make broad statements or suggestions that the UTMA/UGMA serves no beneficial purpose.

[drew]

I disagree but I have not tripple checked the rules in a while, my recollection is that the assets reporting requirement is essentially a static snapshot as of the date of the FASFA form completion which generally is early spring. Hence if you can rapidly lawfully deplete the counted assets in the UTMA BEFORE the report date so be it.

My lay opinion is that there are some open doors to deliver said funds to kid say like tomorrow and you sit there until the funds are redoposited when unfer the rules they are not counted or count at a lesser rate.

The rules do not mesh well at all and there are some viable grey areas to sidestep that 35% issue. Hint, a 529 owned by Aunt Mable for same kid is not counted under FAFSA as an available asset and a kids transfer of large sums to himself in said account is not a gift under the federal code and in about 49 states a nonowner payment is legally OK.

[rsinj]

"I want the control ..."

Key statement - so, it is not appropriate for YOU.

[itstoomuch]

Doing a spend down within 2 years of college is a very dangerous thing to do. A FAFSA filed in 2006 will look at 2005 and 2004 tax years. Or for years when student is junior and sophmore. To properly adjust funds, the assets should have been repositioned in 2003-a great time to have done it, if you had the nerve. I didn't even with the advice of advisors, tax programs, and tables.

[user_2529]

The '06-'07 FAFSA form I am looking at asks for student and parent income info from 2005 only. There may be institutional forms that go back two years for income information but I'm not aware of them.

The asset questions begin with "As of today, what is (total current balance) or (net worth of)" which I interpret literally as the day you complete the FAFSA. If a certain transaction takes place on 1/15 and I am completing the form on 2/15, I am going to list the value of an account "today", not its value on 12/31 or some other date.

[drew]

I'm not so sure that to deliver the UTMA funds as is likely pemitted by law and to have the individual reposition the funds into an uncounted account as is clearly also permtted just prior to completion of a FAFSA is in any dark grey area of ethics.

To leave the funds in place and fail to report them certainly is a violation on many levels.

[itstoomuch]

I am corrected on FAFSA.

I add that some of monies was held in joint capacity with son and was dedicated to his future. Cashing the funds to move into 529 was a simple thing to do.

[drew]

My last recollection of the FAFSA forms as to assets was a snapshot of as of when the form was completed date , not YE 2005 unless you happened to complete the forms that day.

So any legal asset repositioning ahead of reporting would seem OK as per FAFSA

[cgorab]

Incomes of the parents and the student are assessed using year-end data from the year (commonly called the "base year") prior to the year when the student will be entering college. For the 2004-2005 college year, income will be assessed using the 2003 calendar year information (e.g., 2003 tax return).

Assets of the parents and the student are assessed as of the date the financial aid application forms are signed.

[jamie225]

good one.. I think it is a blessed way to do the work