1) My mother opened a custodial account many years ago when I was a minor. She's the custodian. No money has ever been removed, and I actually know the cost basis for it. It's in a high fee fund at brokerage where I do no business. My question is should I cash this in now to move it an appropriate place or wait to inherit it upon her death. The only advantage to waiting would be if there is any kind of reset to the cost basis triggered by her death. I have not been able to Google this. My guess is that because my name has always been on it, then I bear the full weight of the substantial capital gains. Is that correct?
2) About 6 years ago I opened a custodial account for my son. I don't want him to have to bear all these capital gains like I will. Would it be at all intelligent to liquidate that account and put it in my name only so that he can inherit upon my death at an advantaged cost basis? This all assumes my assumptions in #1 are correct.
Happy to provide detail where necessary.
Thank you for disabusing me of all misconceptions!
2 Custodial Account Tax Consequence Questions
2 Custodial Account Tax Consequence Questions
Personal Finance Blogger at [b]Sunk Costs are Irrelevant[/b] --> currently on hiatus
Re: 2 Custodial Account Tax Consequence Questions
1) I would think these these assets were yours since they were put into the custodial account so they would not receive a step up in basis on your mother's death.
2) The same ownership consideration apply to your son's custodial account so you couldn't take them back and put them in your name and ownership.
The custodial account allows for a small amount of income to be taxed at 0-low rates (2K?) so you might consider tax gain harvesting in small amounts to reduce the taxes on the gains.
2) The same ownership consideration apply to your son's custodial account so you couldn't take them back and put them in your name and ownership.
The custodial account allows for a small amount of income to be taxed at 0-low rates (2K?) so you might consider tax gain harvesting in small amounts to reduce the taxes on the gains.
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Re: 2 Custodial Account Tax Consequence Questions
First of all, before answering your specific questions, control of UGMA/UTMA custodial accounts are supposed to be transferred to to the account owner at the age required by the particular state. This is generally 18-21.
1. The assets were always owned by the child. Therefore, there would be no step up basis, because you would not be inheriting this account because it is already yours. So yes, the capital gains would be yours. Also, any distributions (dividends and capital gains) each year are your taxable income (in the year they occur). I hope you have been filing those with your taxes ever year! Also, get your mother to relinquish custodial control now. It might be messy after she dies (you will probably need a court order). This should just be a simple form.
2. in 2016 the kiddie tax allows you to exempt the first $1050 and $1050 will be taxed at the child's rate (also likely 0%). Therefore, you should be tax gain harvesting in a UGMA/UTMA account as you go. If you have already accumulated more that this, just control the number of shares you sell to split over different years. And for Pete's sake transfer control to them at the appropriate age or shortly there after if they want a delay for some reason.
AGAIN, any transfer to a UGMA/UTMA is an irrevocable gift to the child and it is their asset. The custodian only has temporary control until the state mandated age. The custodian has a fiduciary responsibility to act in the best interests of the child.
1. The assets were always owned by the child. Therefore, there would be no step up basis, because you would not be inheriting this account because it is already yours. So yes, the capital gains would be yours. Also, any distributions (dividends and capital gains) each year are your taxable income (in the year they occur). I hope you have been filing those with your taxes ever year! Also, get your mother to relinquish custodial control now. It might be messy after she dies (you will probably need a court order). This should just be a simple form.
2. in 2016 the kiddie tax allows you to exempt the first $1050 and $1050 will be taxed at the child's rate (also likely 0%). Therefore, you should be tax gain harvesting in a UGMA/UTMA account as you go. If you have already accumulated more that this, just control the number of shares you sell to split over different years. And for Pete's sake transfer control to them at the appropriate age or shortly there after if they want a delay for some reason.
AGAIN, any transfer to a UGMA/UTMA is an irrevocable gift to the child and it is their asset. The custodian only has temporary control until the state mandated age. The custodian has a fiduciary responsibility to act in the best interests of the child.
Re: 2 Custodial Account Tax Consequence Questions
Thank you Spirit Rider!
1) Yes, I've been covering the yearly capital gains. So, everything's fine from a current tax perspective.
2) I haven't been taking gains because I created the portfolio with the intent of buying a good index (or stock) and watching it compound over time. I guess I need to re-think that aspect though in light of the tax considerations.
1) Yes, I've been covering the yearly capital gains. So, everything's fine from a current tax perspective.
2) I haven't been taking gains because I created the portfolio with the intent of buying a good index (or stock) and watching it compound over time. I guess I need to re-think that aspect though in light of the tax considerations.
Personal Finance Blogger at [b]Sunk Costs are Irrelevant[/b] --> currently on hiatus
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Re: 2 Custodial Account Tax Consequence Questions
You are misunderstanding what I said. I stated that you should tax gain harvest. This is when you sell a security with capital gains and then rebuy the same security. This allows you to keep the position, but harvest the capital gain tax liability when you are in a favorable capital gains tax rate.slug wrote:2) I haven't been taking gains because I created the portfolio with the intent of buying a good index (or stock) and watching it compound over time. I guess I need to re-think that aspect though in light of the tax considerations.
This is common for people with space in the 15% tax rate (0% capital gains). People with savings bonds in children's names should also consider reporting annual interest instead of the default to defer taxes if the tax rate will be zero.
NOTE: There is no problem with selling an appreciated security and rebuying the same exact security. There is no wash sale rule on gains only losses.
Re: 2 Custodial Account Tax Consequence Questions
Correct, I was misunderstanding. Thanks for taking the time to clarify.
Personal Finance Blogger at [b]Sunk Costs are Irrelevant[/b] --> currently on hiatus
Re: 2 Custodial Account Tax Consequence Questions
slug wrote:Thank you Spirit Rider!
1) Yes, I've been covering the yearly capital gains. So, everything's fine from a current tax perspective.
What does this mean? If you haven't sold anything there are no taxes involved. You would have to report income from dividends and capital gains distributions, which is a different thing.
2) I haven't been taking gains because I created the portfolio with the intent of buying a good index (or stock) and watching it compound over time. I guess I need to re-think that aspect though in light of the tax considerations.
That said, the idea that one's heirs benefit from leaving the assets as an inheritance with basis step-up is a sound idea and might be considered in the future. It is one of the much overlooked benefits of the tax efficiency of assets in taxable accounts that obtain return mainly from capital gains.
Re: 2 Custodial Account Tax Consequence Questions
1) Yes, I meant the extensive dividends.
Personal Finance Blogger at [b]Sunk Costs are Irrelevant[/b] --> currently on hiatus