UTMA funded from grandparents

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KidIcarus
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UTMA funded from grandparents

Post by KidIcarus » Sat Oct 05, 2019 7:58 pm

My child recently received a check written to him for $100 from a grandparent. That gave me the idea of opening a UTMA account for him and using that to deposit these small gifts he receives. I don't forsee any large deposits to this UTMA account. Just a couple hundred dollars a year from gifts from relatives potentially. My wife and I would not gift to this UTMA account.

My child already has a 529 account. My wife and I are funding that and don't need assistance. We will most likely gift $15K each to the account this year.

From what I've read, this seems fine from a tax and gift perspective. Anything I'm missing or anything else I should consider before doing this?

Thanks as always for the advice!
Last edited by KidIcarus on Sun Oct 06, 2019 10:41 am, edited 1 time in total.

dbr
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Re: UTMA funded from grandparents

Post by dbr » Sat Oct 05, 2019 8:58 pm

I would think gifts of that size would be for the child to spend on something useful or just fun. Are the grandparents and other relatives saying they intend the money to be saved?

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KidIcarus
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Re: UTMA funded from grandparents

Post by KidIcarus » Sun Oct 06, 2019 7:48 am

I would be able to match these gifts to him for spending money. If he receives a check for $100 from his grandparents, that could be deposited into his UTMA and I could give him another $100 cash for spending.

I am mostly wondering about any tax and legal obligations here. My wife and I have been contributing $15K each to his 529 for the last several years, so I know that at least in the short term our gift tax exclusion to him will be used up.

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RickBoglehead
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Re: UTMA funded from grandparents

Post by RickBoglehead » Sun Oct 06, 2019 7:51 am

Yes, you can setup a UTMA account for these gifts.

If you give your minor child spending money, there is no gift tax.... Allowance?
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lakpr
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Re: UTMA funded from grandparents

Post by lakpr » Sun Oct 06, 2019 7:54 am

An investments account UTMA than a savings account perhaps? Fidelity has these Zero funds with zero minimum and zero expenses that are just perfect fit...

dbr
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Re: UTMA funded from grandparents

Post by dbr » Sun Oct 06, 2019 8:18 am

KidIcarus wrote:
Sun Oct 06, 2019 7:48 am
I would be able to match these gifts to him for spending money. If he receives a check for $100 from his grandparents, that could be deposited into his UTMA and I could give him another $100 cash for spending.

I am mostly wondering about any tax and legal obligations here. My wife and I have been contributing $15K each to his 529 for the last several years, so I know that at least in the short term our gift tax exclusion to him will be used up.
The legal obligation is to spend the money for appropriate benefits for the child and to turn the money over to the child at majority. The recourse for not doing this is a civil suit against the parents by the child. Owning assets in a UTMA makes the child liable for income tax reporting on income earned. For a few hundred dollars in the account there won't be enough income to require reporting but later on there could be. Note this also affects the income tax filing of the parent via possible "kiddie tax" provisions. The child may get a 1099 from the bank or investment company each year.

A UTMA account is just an extra complication for both the parents and the child that might serve no useful purpose for saving a few hundred dollars here and there. You already have a better election for putting serious money away for the child. If relatives want their contribution to be for future benefit for the child they can also contribute to a (the) 529.

I still think the kids should just have the money to spend if the amounts are what you say.

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RickBoglehead
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Re: UTMA funded from grandparents

Post by RickBoglehead » Sun Oct 06, 2019 8:28 am

When a young child is sent $100 from a grandparent, that's not "spending money" IMO. I don't agree with the give it to the child, nor the legal responsibility stuff. Not one of the checks ever said "for college" or frankly anything beyond "Happy Birthday, Bob". You're the parent, it's your job to make decisions in the child's best interests, and a few hundred a year is nothing. Sometimes we bought something for the child, and said to the relative, "Bob got a ___ with your money". Most of the time we didn't as they had what they needed.

When they reached their teens the money was deposited, along with allowance, into the Dad Bank, which paid 5% interest. That money was theirs for the asking.
dbr wrote:
Sun Oct 06, 2019 8:18 am
The legal obligation is to spend the money for appropriate benefits for the child and to turn the money over to the child at majority. The recourse for not doing this is a civil suit against the parents by the child.
Do you know of a lot of 6 year olds that track the $50 checks from Grandpa and Grandma and then go after the parents with a civil suit if they money is not turned over at age of majority?

I turned over the Dad bank, as I accounted for it. They had no idea what they received or did not receive. I also paid for college for 4 years in 6 figures for each.
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dbr
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Re: UTMA funded from grandparents

Post by dbr » Sun Oct 06, 2019 8:40 am

RickBoglehead wrote:
Sun Oct 06, 2019 8:28 am

Do you know of a lot of 6 year olds that track the $50 checks from Grandpa and Grandma and then go after the parents with a civil suit if they money is not turned over at age of majority?
The OP asked a question about legal obligations and I answered it. Of course 6 year olds don't sue their parents. One can find instances where parents do go wrong with UTMAs and kids don't get money they should have and my answer was what recourse the kids have to do something about it when they become adults. It is also possible for adult children to find they have years of tax returns to be corrected because they did not file on UTMA income some parent never told them they had. The OP asked a question about taxes and I answered it.

Maybe the answer is that if it is not one of those kinds of things, then, no, there are not legal or tax issues with a UTMA.

HomeStretch
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Re: UTMA funded from grandparents

Post by HomeStretch » Sun Oct 06, 2019 8:46 am

I think the local bank UTMA has merit in teaching kids about money and banking.

We started giving our child (who enjoyed numbers and the concept of money) an allowance of $5 per week at a young age as a learning exercise. Concurrently we set up an envelope system. The $5 was allocated to: $2 spending envelope, $1 charitable giving envelope and $2 savings envelope. We let the child decide the allocation of gifts to the envelopes and where the charitable $ were donated. Most times the allocation was very reasonable, once in awhile It was used for spending on a large wish item.

We opened a UTMA passbook account at our local bank. Once a month we went in so child could interact with the teller while making a deposit or use the coin counting machine or to watch how ATM or safe deposit boxes worked. Also received a play checkbook to learn how to write checks and sign name in cursive.

Our child entered college knowing how to use an online account, ATM machine, write a check (rarely used except for apartment security deposit), and how credit cards worked. Many friends didn’t know how to use these and parents were scrambling to get accounts and ATM cards set up right before school started.

Edited for typos.
Last edited by HomeStretch on Sun Oct 06, 2019 9:51 am, edited 1 time in total.

dbr
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Re: UTMA funded from grandparents

Post by dbr » Sun Oct 06, 2019 8:57 am

HomeStretch wrote:
Sun Oct 06, 2019 8:46 am
I think the local bank UTMA has merit in teaching kids about money and banking.

We started giving our child (who enjoyed numbers and the concept of money) an allowance of $5 per week at a young age as a learning exercise. Concurrently we set up with an envelope system. The $5 was allocated to: $2 spending envelope, $1 charitable giving envelope and $2 savings envelope. We let the child decide the allocation to the envelopes and where the charitable $ we’re donated. Most times the allocation was very reasonable, once in awhile It was used for spending on a large wish item.

We opened a UTMA passbook account at our local bank. Once a month we went in so child could interact with the teller while making a deposit or use the coin counting machine or to watch how ATM or safe deposit boxes worked. Also received a play checkbook to learn how to write checks and sign name in cursive.

Our child entered college knowing how to use an online account, ATM machine, write a check (rarely used except for apartment security deposit), and how credit cards worked. Many friends didn’t know how to use these and parents were scrambling to get accounts and ATM cards set up right before school started.
Excellent. You could also have them file tax returns so that this would already be familiar to them the first time they are on their own and would have to do that.

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Re: UTMA funded from grandparents

Post by HomeStretch » Sun Oct 06, 2019 9:31 am

dbr wrote:
Sun Oct 06, 2019 8:57 am
Excellent. You could also have them file tax returns so that this would already be familiar to them the first time they are on their own and would have to do that.
I wouldn’t want to overwhelm OP, who has young children. Tax returns, among other things, were college-age lessons in our house. :D

dbr
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Re: UTMA funded from grandparents

Post by dbr » Sun Oct 06, 2019 9:44 am

HomeStretch wrote:
Sun Oct 06, 2019 9:31 am
dbr wrote:
Sun Oct 06, 2019 8:57 am
Excellent. You could also have them file tax returns so that this would already be familiar to them the first time they are on their own and would have to do that.
I wouldn’t want to overwhelm OP, who has young children. Tax returns, among other things, were college-age lessons in our house. :D
Right. Not when young. High school is a good time. But actually, I have had some interesting discussions with elementary age math students about taxes and how they are assessed. It can be a good application of percentages that they start working with in fourth grade or so. Also the computation involves enough steps that it is a good example of a real world multi-step story problem. Being able to work through a problem in more than one step is a good level to reach in fourth grade as well. Then again, I don't know if it helps kids to see why they should work on their math as the other answer would be just install TurboTax on your school issued iPAD.

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KidIcarus
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Re: UTMA funded from grandparents

Post by KidIcarus » Sun Oct 06, 2019 10:50 am

Yes, I definitely don't forsee this UTMA growing very large. Because of that, I don't see it causing large tax complications. I am interested in it more as a way to introduce him to saving and investing. We would just fund it with these small gifts and he would assume control at the age of maturity. Maybe the account will be large enough for a new iPhone 25 at that time. :D

NotWhoYouThink
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Re: UTMA funded from grandparents

Post by NotWhoYouThink » Sun Oct 06, 2019 1:21 pm

If my nieces and nephews had to turn cash gift I gave them over to their parents to be held until they were 21, I would start slipping them money under the table. If I want to support their college I'll send money to their 529, but a birthday gift should be available for spending, saving, or squandering at the recipient's discretion. Paying for their college is their parents' responsibility, not mine.

Also forcing them to give doesn't teach them generosity, it teaches them taxation. It's only charity if it is voluntary.

Fourth graders really don't understand tax policy, corporate finance or portfolio theory no matter how much their parents drone on. But they know if they blow their money on whatever this year's Pokemon cards are they won't have enough for some other thing they want.

Good judgement comes from experience. Experience includes making your own decisions, some of them bad.

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