This is the letter that I am mailing today in the regular US mail. I invite your comments about it.
Aug. 15, 20
John J. Brennan, CEO
The Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482-2600
Dear Mr. Brennan,
Re: Modifying your Coverdell ESA account to accept money from UGMA/UTMAs
I am a Vanguard mutual fund shareholder, and am interested in having my son open Coverdell ESAs for his minor children (below age 14), at your company. However, I see real snags in your application form, which wouldn’t allow him to open the ESA accounts. That’s because the funds would come from UTMA accounts.
Your ESA accounts, which are based on IRS form 5305-EA, Rev. March 2002 (a copy is enclosed), could easily be modified to accept UTMA money. Article X in the form allows additional provisions to be added. What’s needed is inserting legal clauses to allow for the retaining of the governing laws of the UGMA/UTMA. The protection gained by it wouldn’t be just for Vanguard but also for everyone else connected with the account, particularly the UGMA/UTMA custodian (see court case below).
My plan would be as follows: I, as a grandfather, would make annual gifts of appreciated common stocks onto NC UTMA VBS accounts for each grandchild. My wife will be the custodian. Annually, she would sell about $2,300 worth of stocks for this purpose.* The kiddie tax would apply on the sale. The proceeds of the sale would stay in a MMF within the UTMA. Next, my wife, as custodian, would write checks of $2,000 and hand them over to our son. He will open Coverdell ESAs for his minor children at your place and continue to add similar amounts annually. By having the UTMA account as a donor for the contributions, we eliminate the modified AGI limitations that would otherwise affect my son eligibility to open the accounts. By the way, I don’t see an entry in your ESA application form for the donor’s identity. Very important item!
The College Saving Plan of Iowa (a 529 plan), in which Vanguard is involved as an investment manager, does have a provision to accept UGMA/UTMA money. Why can’t Vanguard arrange for similar legal provisions in the Coverdell ESA account?
I am also enclosing a copy of a court-case proceeding issued at the N.C. Court of Appeals, filed on 5 Dec. 2000. This case which involved a UGMA/UTMA beneficiary, was resolved with the 18-year-old beneficiary winning the case, receiving all the money and even quitting school. Her mother as a custodian and Wachovia Bank as a trustee, were found at fault. I am convinced that you would rather not see Vanguard, my wife as the UTMA’s custodian and my son as a “responsible individual” of the ESA, involved in such predicaments. The purpose of sending the case material is to emphasize the power of the UTMA/UGMA instrument so that we all don’t get stuck in similar court battles.
I am also enclosing a copy of VBS Education Saving Adoption Agreement to help you get on the ball quicker (by the way, there is an error in the last page while specifying IRS Form 5305-A, instead of 5305-EA. These two forms are completely different “animals”.)
A copy of NC UTMA’s act is also included as a reference for your legal crew.
Your comments would be appreciated.
Sincerely,
- She would sell more, up to the $11,000 allowed annually as tax- exempt gift per donee. The rest of the money would go to a 529 plan.