UTMA help.... advice needed for inherited UTMA

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sabrenu82
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UTMA help.... advice needed for inherited UTMA

Post by sabrenu82 » Tue Sep 18, 2018 9:21 pm

Hello,

My daughter has an UTMA she received from a grandparent and I’m seeking advice on what to do with this account.

My daughter is 6 years old and my wife is the custodian of the account. It currently has $30,000 in municipal bonds and $5,000 cash sitting in it.
The municipal bonds are in a different state than we currently live in. The account is currently with UBS and i’m looking to move it over to Fidelity or Vanguard.

Is it best to stay with the municipal bonds? (rates between 3 to 4.25%) or should we sell and move it into a total stock market index fund?
Also, with the cash sitting there, should I have it reinvested in the total stock market index fund, or is there better type of funds to select for an UTMA?
Can it be rolled into a 529?

Any advice on what I should do with this account would be appreciated.

Thanks!

livesoft
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Re: UTMA help.... advice needed for inherited UTMA

Post by livesoft » Tue Sep 18, 2018 9:38 pm

Thank goodness your daughter is still alive! So this UTMA was not inherited, but presumably you meant the custodian has changed from her grandparent to her parent.

I would not roll into 529.

It is really up to you to decide how to invest this money. Personally, I would put it all in a Vanguard LifeStrategy 2060 fund for awhile and be prepared to file a tax return. I suppose the muni bonds were to keep annual investment payouts to below a threshold where a tax return for your daughter was necessary. The LifeStrategy fund would not be too different from 100% Total US Stock Market Index.

In any case, I would get it away from UBS myself.
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MP123
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Re: UTMA help.... advice needed for inherited UTMA

Post by MP123 » Tue Sep 18, 2018 10:14 pm

livesoft wrote:
Tue Sep 18, 2018 9:38 pm
In any case, I would get it away from UBS myself.
Agreed 100% on UBS.

At age 6 a total US stock market fund or even total world fund would be right. Munis and cash have their place but your daughter needs growth and has a long time to make up any corrections.

Keep it simple.

Spirit Rider
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Re: UTMA help.... advice needed for inherited UTMA

Post by Spirit Rider » Wed Sep 19, 2018 1:33 am

With the recent tax reform change to trust tax brackets for UTMA unearned income above the dependents standard deduction and tax rate. It is far more favorable to hold equities in UTMA accounts.

You can have up to $4700/year in LTCGs and QDIVs and pay no taxes. However, even with that, you will want to do yearly tax gain harvesting up to the point where you would pay taxes. Given the amount involved that may be never.

However, this would enable you to rollover the balance in the UTMA account to a UTMA 529 account prior to college. If you and the student will be on the bubble of financial aid. UTMA accounts can be very detrimental to the FAFSA calculation.

livesoft
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Re: UTMA help.... advice needed for inherited UTMA

Post by livesoft » Wed Sep 19, 2018 5:30 am

Spirit Rider wrote:
Wed Sep 19, 2018 1:33 am
However, this would enable you to rollover the balance in the UTMA account to a UTMA 529 account prior to college. If you and the student will be on the bubble of financial aid. UTMA accounts can be very detrimental to the FAFSA calculation.
But its not like a student-owned 529 account is not detrimental to the FAFSA calculation. And perhaps the grandparent wanted this money to be used for college anyways. Nevertheless, one way to not have this money in a FAFSA calculation is to spend it before it gets to that point. A new car, a round-the-world coming of age vacation, ... come to mind.
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CRTR
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Re: UTMA help.... advice needed for inherited UTMA

Post by CRTR » Wed Sep 19, 2018 6:06 am

Spirit Rider wrote:
Wed Sep 19, 2018 1:33 am
With the recent tax reform change to trust tax brackets for UTMA unearned income above the dependents standard deduction and tax rate. It is far more favorable to hold equities in UTMA accounts.

You can have up to $4700/year in LTCGs and QDIVs and pay no taxes. However, even with that, you will want to do yearly tax gain harvesting up to the point where you would pay taxes. Given the amount involved that may be never.

However, this would enable you to rollover the balance in the UTMA account to a UTMA 529 account prior to college. If you and the student will be on the bubble of financial aid. UTMA accounts can be very detrimental to the FAFSA calculation.
Good point and spot on!

The application of trust tax rates to the unearned income may or may not be advantageous depending upon whether the child will have substantial unearned income and whether the parents are in higher income tax brackets. To avoid this issue entirely, a tax efficient investment strategy should be used. Tax gain harvesting strategies (as already mentioned) should be used. The easiest way to do so is to use tax-efficient/tax-managed, widely diversified, equity mutual funds/ETFs. My choice woudl be VT and VHGEX.

If the child plans to attend college, Spirit Rider's suggestion to roll the assets into a UTMA 529 makes the most sense. If I understand this process correctly, all assets in the UTMA have to be liquidated to cash before they can be converted to a 529. This makes tax management of the account already discussed even more important. If the child does not plan to attend college, I probably would not make the change. Unlike other college savings accounts, UTMA assets are not limited to education expenses and can be used for anything related to the child. Likewise, upon becoming a legal adult, the child can use the money without limitations.

CRTR
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Re: UTMA help.... advice needed for inherited UTMA

Post by CRTR » Wed Sep 19, 2018 6:07 am

duplicate post deleted
Last edited by CRTR on Wed Sep 19, 2018 8:32 am, edited 1 time in total.

Grt2bOutdoors
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Re: UTMA help.... advice needed for inherited UTMA

Post by Grt2bOutdoors » Wed Sep 19, 2018 6:33 am

The muni bonds have nice yields and I believe the intent of the grandfather was to use a conservative investment to preserve the nominal principal and not have to pay taxes on the income. Mission accomplished!

Now, if the new custodian wishes to invest for growth, I would suggest using Vanguard Total Stock Market Index. This is one of the funds I use in my kids UTMA. +1 on tax gain harvesting - I use the Vanguard 500 as my harvest partner. What is meant by harvesting? Each year as indicated in previous posts, you sell/exchange enough shares such that the amount of gains equals $4,700 less qualified dividend and interest income. You take those proceeds and immediately purchase a similar fund like the S&P 500 or Large Cap Index. Next year, rinse and repeat - you are increasing the basis in the investment and reducing/eliminating any tax liability in the future.

What a wonderful gift from the grandfather.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Spirit Rider
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Re: UTMA help.... advice needed for inherited UTMA

Post by Spirit Rider » Wed Sep 19, 2018 7:52 am

livesoft wrote:
Wed Sep 19, 2018 5:30 am
Spirit Rider wrote:
Wed Sep 19, 2018 1:33 am
However, this would enable you to rollover the balance in the UTMA account to a UTMA 529 account prior to college. If you and the student will be on the bubble of financial aid. UTMA accounts can be very detrimental to the FAFSA calculation.
But its not like a student-owned 529 account is not detrimental to the FAFSA calculation. And perhaps the grandparent wanted this money to be used for college anyways. Nevertheless, one way to not have this money in a FAFSA calculation is to spend it before it gets to that point. A new car, a round-the-world coming of age vacation, ... come to mind.
A student owned 529 is treated as a parental asset for the FAFSA EFC calculation. It is assessed at at maximum rate of 5.64% vs. the 20% rate of a UTMA.

A car is certainly a reasonable expenditure, but spending down a UTMA on anything just to avoid FAFSA assessment is not. What if the student really needs the money for college? The parental assessment will have minimal impact on financial aid.

Grt2bOutdoors
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Location: New York

Re: UTMA help.... advice needed for inherited UTMA

Post by Grt2bOutdoors » Wed Sep 19, 2018 7:55 am

Spirit Rider wrote:
Wed Sep 19, 2018 7:52 am
livesoft wrote:
Wed Sep 19, 2018 5:30 am
Spirit Rider wrote:
Wed Sep 19, 2018 1:33 am
However, this would enable you to rollover the balance in the UTMA account to a UTMA 529 account prior to college. If you and the student will be on the bubble of financial aid. UTMA accounts can be very detrimental to the FAFSA calculation.
But its not like a student-owned 529 account is not detrimental to the FAFSA calculation. And perhaps the grandparent wanted this money to be used for college anyways. Nevertheless, one way to not have this money in a FAFSA calculation is to spend it before it gets to that point. A new car, a round-the-world coming of age vacation, ... come to mind.
A student owned 529 is treated as a parental asset for the FAFSA EFC calculation. It is assessed at at maximum rate of 5.64% vs. the 20% rate of a UTMA.

A car is certainly a reasonable expenditure, but spending down a UTMA on anything just to avoid FAFSA assessment is not. What if the student really needs the money for college? The parental assessment will have minimal impact on financial aid.
Parental assets are now assessed at a 12 percent rate, the 5.64% rate is now history.

Money is fungible, take the money from the UTMA and pay for college. Segregating the money for the purpose of bucketing only makes it more difficult to use it for other purposes, flexibility is key. Tell the child as they are growing up, grandpa saved this money little by little, deferring immediate consumption (you can figure out best how to convey this) so that you would not have to be burdened with debt when advancing your education and dreams to become.......or graduate with a degree in....
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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