Process to gift securities to UGMA

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coalcracker
Posts: 377
Joined: Sat Feb 04, 2012 12:25 pm

Process to gift securities to UGMA

Post by coalcracker » Mon Sep 01, 2014 8:15 pm

I have decided it makes sense for me to gift appreciated securities to my 9 month old in the form of a UGMA account. We have a fair amount of retirement savings in taxable that I would use for this. The UGMA money would definitely be used, as we would be sending our child to private school (public schools are really poor in our district). I want to make sure I have the mechanics correct for this transaction.

Let's say I have $10k I would like to save for future private school expenses. Assume 10k would hold $1900 of long term cap gains to be taxed at child's rate. Anything missing in these steps?

1. Gift $10k of an index mutual fund from my taxable account to my son's UGMA account, in kind transfer I assume
2. Sell the mutual fund within the UGMA and purchase a less volatile fund (bond fund).
3. Pay the small amount of taxes due on the $1900 cap gains
4. Invest $10k of my own money back into taxable account to replenish the money that was gifted to UGMA
5. Allow the UGMA money to sit until it is needed for use
6. Pay for educational expenses. Is this reimbursed from the account after expenses incurred, or do funds from the UGMA go directly to educational institution?
7. Lather, rinse, repeat in future years until I have enough to pay for expenses.

Also, is there a reason to wait until we are closer to needing the money to gift the securities, say in 5 years time?

Thanks,
cc

Wagnerjb
Posts: 7190
Joined: Mon Feb 19, 2007 8:44 pm
Location: Houston, Texas

Re: Process to gift securities to UGMA

Post by Wagnerjb » Tue Sep 02, 2014 8:09 am

In paying for educational expenses, I don't think it matters who actually pays. If you pay, be sure to keep a good record of the payments, and reimburse yourself from the UGMA. Obviously, it is better to have the UGMA pay directly if that is practical.

I don't see anything wrong with your plan. However, you might consider re-investing the UGMA money in an investment that pays interest or dividends. These interest and dividends will be tax-free if they are under your child's tax threshold. The earlier you start and the more interest and dividends (and capital gains) you generate in the UGMA, the more tax you save.

Best wishes.
Andy

Gill
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Location: Florida

Re: Process to gift securities to UGMA

Post by Gill » Tue Sep 02, 2014 9:08 am

coalcracker wrote:Pay the small amount of taxes due on the $1900 cap gains
Aren't you forgetting the "Kiddie Tax" which will cause this to be taxed at your marginal rate?
Gill

Grt2bOutdoors
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Location: New York

Re: Process to gift securities to UGMA

Post by Grt2bOutdoors » Tue Sep 02, 2014 9:23 am

Gill wrote:
coalcracker wrote:Pay the small amount of taxes due on the $1900 cap gains
Aren't you forgetting the "Kiddie Tax" which will cause this to be taxed at your marginal rate?
Gill
The first $1K of gains/interest/dividends is tax exempt, the second $1K is taxed at the childs rate of 10%, anything after $2K is taxed at the parents rate.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

dickenjb
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Location: Philadelphia PA

Re: Process to gift securities to UGMA

Post by dickenjb » Tue Sep 02, 2014 9:53 am

Grt2bOutdoors wrote:The first $1K of gains/interest/dividends is tax exempt, the second $1K is taxed at the childs rate of 10%, anything after $2K is taxed at the parents rate.
Right which means if the gains are LT no tax will be due. No tax on the first $1000, kids rate=0% on next $1000.

OP - this is a good strategy.

Gill
Posts: 4191
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Process to gift securities to UGMA

Post by Gill » Tue Sep 02, 2014 10:10 am

Grt2bOutdoors wrote:
Gill wrote:
coalcracker wrote:Pay the small amount of taxes due on the $1900 cap gains
Aren't you forgetting the "Kiddie Tax" which will cause this to be taxed at your marginal rate?
Gill
The first $1K of gains/interest/dividends is tax exempt, the second $1K is taxed at the childs rate of 10%, anything after $2K is taxed at the parents rate.
Thanks. I had forgotten this aspect of the Kiddie Tax and was thinking all the income was thrown back on the parent.
Gill

LongerPrimer
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Re: Process to gift securities to UGMA

Post by LongerPrimer » Tue Sep 02, 2014 10:43 am

Lucky dog.
UGMA s are so much better today than 20 25,and 30 years ago. DS UGMA had initial 600 and dividends were counted in that 600 :|

dickenjb
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Joined: Tue Jan 05, 2010 1:11 pm
Location: Philadelphia PA

Re: Process to gift securities to UGMA

Post by dickenjb » Tue Sep 02, 2014 3:20 pm

LongerPrimer wrote:Lucky dog.
UGMA s are so much better today than 20 25,and 30 years ago. DS UGMA had initial 600 and dividends were counted in that 600 :|
Yeah but $600 then was the equivalent of $2000 now. And dividends are still counted toward the $1000 and $1000.

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