UTMA accounts

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bampf
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UTMA accounts

Post by bampf » Mon Oct 16, 2017 8:45 am

Some years ago I populated some UTMA accounts for my kids. At the time it seemed like the right thing to do. However, as they get older I worry about whether they are mature enough to manage that money once they turn 18. In retrospect I think having the accounts turn over at 21 or upon graduation from university. Two questions:

1. Have another people done this and whats your experience with turning over significant sums to 18 years olds?
2. Suggestions about how to resolve this if I do decide to yank it back.

Thanks!
Bampf

Gill
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Re: UTMA accounts

Post by Gill » Mon Oct 16, 2017 8:53 am

It's too late. The funds belong to them and you can't take them back, although you could spend it on non necessaries for them. You made an irrevocable gift to them.
Gill
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dm200
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Re: UTMA accounts

Post by dm200 » Mon Oct 16, 2017 9:17 am

Gill wrote:
Mon Oct 16, 2017 8:53 am
It's too late. The funds belong to them and you can't take them back, although you could spend it on non necessaries for them. You made an irrevocable gift to them.
Gill

True.

Also, the age at which the custodian is required to tuen over the funds to the "minor" ranges from 18 to 25, depending on applcable state law.

In some states, there may be a choice of this age at the time you open the account. In Virginia, the choices are 18 OR 21. It is always, as best I understand, allowable to turn over the funds at an earlier age.

aristotelian
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Re: UTMA accounts

Post by aristotelian » Mon Oct 16, 2017 9:26 am

I am custodian of inheritances that my kids received from a wealthy uncle who died early. They are not in UTMA accounts, but similarly they will inherit full control when they turn 18. This will likely by about $2M each by that time. We are absolutely terrified. Just hope they turn out to be good kids. I just had a big talk with my 10 year old who spent all his yard sale money on comic books and then realized he did not have enough to get a drawing tablet he has wanted for the last year.

If it were me, I would definitely do 529 or trust with a higher age limit and/or conditions.

Boglegrappler
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Re: UTMA accounts

Post by Boglegrappler » Mon Oct 16, 2017 9:29 am

I'm not sure of the benefit of the UTMA UGMA accounts for most people.

It seems to me that the biggest advantage is if you were expecting to be subject to estate taxes, you can get 14k (28k for a married couple) to each of your children annually and it will be out of your estate if you happen to die. Over a 20 year period, for instance, that would move 560k out of your taxable estate, and save about 40% of that in estate taxes.

The catch is that the money actually belongs to the kids. And at age 21 or so they might decide to burn through it slowly or rapidly, rather than treat it as the thoughtful planning that it was. A 24 year old receiving a windfall of half a million is likely to have some difficulty putting things in proper perspective, IMO. Admonishing them to spend only the income from the assets is likely to fall on either deaf or ignorant ears....probably both.

So for people not subject to estate taxes, you might simply be better off to keep the money and make sure your will reflects what you want done upon your death. If the so-called "kiddie tax" ever were repealed, you might think differently though. As of now, getting the assets in the hands of your children doesn't give you much of a break on having the earnings taxed at your children's rate instead of yours.

mega317
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Re: UTMA accounts

Post by mega317 » Mon Oct 16, 2017 10:01 am

Agreed, it's too late. And agreed on the non-necessities. We were you planning to buy them cars, or school trips, or something along those lines? You could spend down at least some of it.
aristotelian wrote:
Mon Oct 16, 2017 9:26 am
I just had a big talk with my 10 year old who spent all his yard sale money on comic books and then realized he did not have enough to get a drawing tablet he has wanted for the last year.
That might become a lesson that sticks with him.

SGM
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Re: UTMA accounts

Post by SGM » Mon Oct 16, 2017 10:07 am

I have been trying to get my children to take over their UTMA accounts. I have warned them that if they do not change the account registration, the accounts will revert back into my estate at death. They seem to be too busy working. I cannot transfer the accounts without their signatures either medallion or just signature guaranteed. I think I will get a Vanguard financial advisor to speak to them and maybe start managing their accounts.

aristotelian
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Re: UTMA accounts

Post by aristotelian » Mon Oct 16, 2017 10:13 am

mega317 wrote:
Mon Oct 16, 2017 10:01 am
Agreed, it's too late. And agreed on the non-necessities. We were you planning to buy them cars, or school trips, or something along those lines? You could spend down at least some of it.
I am the legal custodian but it is their money. I have to report everything to the court. So far only thing I am allowed to spend on is taxes and attorney fees. I have an application in to pay for orthodontia but I am told I am too high income so it will most likely be my responsibility.

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Re: UTMA accounts

Post by Grt2bOutdoors » Mon Oct 16, 2017 10:15 am

bampf wrote:
Mon Oct 16, 2017 8:45 am
Some years ago I populated some UTMA accounts for my kids. At the time it seemed like the right thing to do. However, as they get older I worry about whether they are mature enough to manage that money once they turn 18. In retrospect I think having the accounts turn over at 21 or upon graduation from university. Two questions:

1. Have another people done this and whats your experience with turning over significant sums to 18 years olds?
2. Suggestions about how to resolve this if I do decide to yank it back.

Thanks!
Bampf
Do they know about it? The monies are technically theirs, it was an irrevocable gift.
You can not "yank" it back. You can however as Gill indicates use the monies for their benefit (you are spending the money only on them though, not you, spouse or cousins to go to a ball game). Or, you can tell them the monies are to pay for college/university - most kids are fine with that if they are going to school.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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dm200
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Re: UTMA accounts

Post by dm200 » Mon Oct 16, 2017 10:16 am

aristotelian wrote:
Mon Oct 16, 2017 10:13 am
mega317 wrote:
Mon Oct 16, 2017 10:01 am
Agreed, it's too late. And agreed on the non-necessities. We were you planning to buy them cars, or school trips, or something along those lines? You could spend down at least some of it.
I am the legal custodian but it is their money. I have to report everything to the court. So far only thing I am allowed to spend on is taxes and attorney fees. I have an application in to pay for orthodontia but I am told I am too high income so it will most likely be my responsibility.
As you posted before, these are not UTMA or UGMA. Quite a different situation.

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dm200
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Re: UTMA accounts

Post by dm200 » Mon Oct 16, 2017 10:18 am

SGM wrote:
Mon Oct 16, 2017 10:07 am
I have been trying to get my children to take over their UTMA accounts. I have warned them that if they do not change the account registration, the accounts will revert back into my estate at death. They seem to be too busy working. I cannot transfer the accounts without their signatures either medallion or just signature guaranteed. I think I will get a Vanguard financial advisor to speak to them and maybe start managing their accounts.
Are these UTMAs at Vanguard?

While their signatures may be needed to have/retain such accounts at Vanguard, you (as custodian) can withdraw the money and have it payable to each of them.

newguy84
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Re: UTMA accounts

Post by newguy84 » Mon Oct 16, 2017 10:21 am

My parents had a UTMA for me, but on the smaller side (approx. $30-60K) that they used to supplement cash flowing college. While it was my money at 18, I didn't realize I had this money - they just had me sign the Fidelity forms at tax time. I just signed the dotted line without reading all of the fine print and didn't pry. It was only until after I started investing in my 20s that I saw the details of my drawn-down UTMA.

I have also set up UTMAs for my children, along with 529s. I plan on using these, plus cash flowing college, when the time comes. Given our household income, we will not qualify for need-based financial aid, so we prefer the flexibility of an UTMA.

Da5id
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Re: UTMA accounts

Post by Da5id » Mon Oct 16, 2017 10:24 am

Grt2bOutdoors wrote:
Mon Oct 16, 2017 10:15 am
bampf wrote:
Mon Oct 16, 2017 8:45 am
Some years ago I populated some UTMA accounts for my kids. At the time it seemed like the right thing to do. However, as they get older I worry about whether they are mature enough to manage that money once they turn 18. In retrospect I think having the accounts turn over at 21 or upon graduation from university. Two questions:

1. Have another people done this and whats your experience with turning over significant sums to 18 years olds?
2. Suggestions about how to resolve this if I do decide to yank it back.

Thanks!
Bampf
Do they know about it? The monies are technically theirs, it was an irrevocable gift.
You can not "yank" it back. You can however as Gill indicates use the monies for their benefit (you are spending the money only on them though, not you, spouse or cousins to go to a ball game). Or, you can tell them the monies are to pay for college/university - most kids are fine with that if they are going to school.
UMTAs unless absolutely massive can be spent down for childs benefit. Expensive sleep away camps, school trips to foreign countries, etc. And of course they can be used for college, and financial aid is in fact granted with the understanding that the UMTA will largely be spent for college. Or you can leave it all for the kid at 18/21 (whatever your state allows).

Giving kids lots of money at 18/21 is a bad idea IMHO. Hard to predict at a young age (say when the kid is 4) how they will turn out. Even with the best of parenting, some kids go wrong/have a rough patch/aren't mature enough to handle large gobs of money at 18/21. When we wrote our will, attorney suggested a trust giving kids money in chunks at 21/28/35 or something like that. Until then, trustee (kids aunt) can approve spending on their behalf, but she likely won't approve a ferarri. But would likely approve money for a reasonable down payment on a house or such.

Money in UMTA is also really bad if kid has any chance at financial aid.
Last edited by Da5id on Mon Oct 16, 2017 10:36 am, edited 1 time in total.

Topic Author
bampf
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Re: UTMA accounts

Post by bampf » Mon Oct 16, 2017 10:35 am

Thanks for all the advice folks. 21 is the age turnover where I am so that works out better. By then they will have 3 more years of experience and it is all good. Very much appreciate it.

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bampf
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Re: UTMA accounts

Post by bampf » Mon Oct 16, 2017 10:41 am


Do they know about it? The monies are technically theirs, it was an irrevocable gift.
They don't really know about it. They know we have put aside monies but not how much. We have always said it would be for school, first house and that sort of thing.

Thanks again!

Grt2bOutdoors
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Re: UTMA accounts

Post by Grt2bOutdoors » Mon Oct 16, 2017 12:07 pm

bampf wrote:
Mon Oct 16, 2017 10:41 am

Do they know about it? The monies are technically theirs, it was an irrevocable gift.
They don't really know about it. They know we have put aside monies but not how much. We have always said it would be for school, first house and that sort of thing.

Thanks again!
Chances are then it is ingrained in their minds "the money is to pay for school, marriage with the right person or first house". Just keep hammering that point home. Chances are they are not thinking about blowing the money on drugs, jewelry, trips or a Corvette.
"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 accounts

Post by Spirit Rider » Mon Oct 16, 2017 12:48 pm

IANAL, but if there is a large sum of money to justify, it might be possible to transfer UTMA assets to a trust with the UTMA custodian as trustee and the minor exclusively as beneficiary. Even if it means waiting to when they are 18 and they assent.

Maybe one of the BH lawyers or a local attorney could advise. This would allow a later full transfer of control.

indexonlyplease
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Re: UTMA accounts

Post by indexonlyplease » Mon Oct 16, 2017 1:37 pm

I have 2 UTMA for my 2 son's in Florida. They control at 21 per Florida Law. I have been investing since they were young. I have both accounts at Vanguard. I found out that they do not control until I contact Vanguard and release the account to them.

My 21 yr old found out about the UTMA when he opened a Roth IRA at 19. For some reason the UTMA shows under his account but he does not control.

The only thing I have learned is that he could take me to court to have the money released. But that is not a problem now. Also, he was educated on money by us. I may release this year so he can pay taxes on dividend at his low tax bracket. After I talk to my accountant.

So, I would just keep investing in the account unless he has turned into a problem child. At 21 if they blow the money, it will be a hard lesson learned. Nothing us parents can do. We tried.

stilllurking
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Re: UTMA accounts

Post by stilllurking » Mon Sep 30, 2019 1:48 pm

I realize this is a dated thread but the history here helps me understand this a bit more.

*IF* I were to open a UTMA for my kids, is the dividends and interest receive taxable at my rate or theirs? (i.e. I would need to file a return in their name to account for the earnings in the account?)

As others have posted, I'm a bit fearful of an 18/21 year old receiving a sizable chunk of money unless they were responsible or even after college to get them on their feet with a car or a place to live.

My other alternative is to open a brokerage account in my name with the "unwritten" fact that the account is for junior. Then when we deem junior is ready for the money, we can provide it then.

At this point, can I just transfer the shares to junior's name? What are the tax implications for me? Does it end up looking like realizing capital gains and then I pay those taxes and provide junior with the resulting funds?

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dm200
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Re: UTMA accounts

Post by dm200 » Mon Sep 30, 2019 3:48 pm

stilllurking wrote:
Mon Sep 30, 2019 1:48 pm

As others have posted, I'm a bit fearful of an 18/21 year old receiving a sizable chunk of money unless they were responsible or even after college to get them on their feet with a car or a place to live.
Yes - this is a primary reason, in my opinion, why it is often unwise to fund a large balance UTMA.

international001
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Re: UTMA accounts

Post by international001 » Mon Sep 30, 2019 6:21 pm

Plan blackmail. Tell him how to use the money. And tell him that anything that he does not use as you wish, will be discounted in his inheritance.

Grt2bOutdoors
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Re: UTMA accounts

Post by Grt2bOutdoors » Mon Sep 30, 2019 8:43 pm

dm200 wrote:
Mon Sep 30, 2019 3:48 pm
stilllurking wrote:
Mon Sep 30, 2019 1:48 pm

As others have posted, I'm a bit fearful of an 18/21 year old receiving a sizable chunk of money unless they were responsible or even after college to get them on their feet with a car or a place to live.
Yes - this is a primary reason, in my opinion, why it is often unwise to fund a large balance UTMA.
Son/Daughter - the money in the account is for college. We can use the money in the account to pay for college or you can have loans that follow you for the rest of your life. Which do you prefer?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

stilllurking
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Re: UTMA accounts

Post by stilllurking » Mon Sep 30, 2019 9:04 pm

I like the thinking about advising that the money is earmarked for school. I can do that. However, I have 529s funded with over $120K for a 9 year old. I don't want to overfund so I've stopped altogether and just put the money into a brokerage account.

Let's say I've made up my mind and not want to go the UTMA route. What does the tax implications look like for me with the brokerage account transfer at a date and age of my choosing rather than the law?

Grt2bOutdoors
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Re: UTMA accounts

Post by Grt2bOutdoors » Mon Sep 30, 2019 9:09 pm

stilllurking wrote:
Mon Sep 30, 2019 9:04 pm
I like the thinking about advising that the money is earmarked for school. I can do that. However, I have 529s funded with over $120K for a 9 year old. I don't want to overfund so I've stopped altogether and just put the money into a brokerage account.

Let's say I've made up my mind and not want to go the UTMA route. What does the tax implications look like for me with the brokerage account transfer at a date and age of my choosing rather than the law?
If you are holding the money in a regular brokerage account in your name, then you are the owner of the assets. There is no law on when/if you should transfer assets, you own them. Depends on the size of the account at the time of transfer - if you are gifting $1 million dollars, you might have a gift tax issue.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

cshell2
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Re: UTMA accounts

Post by cshell2 » Mon Sep 30, 2019 9:11 pm

My 17 year old has an UTMA. It's just another college fund as far as he's concerned. He doesn't know the details of the account type or even exactly what is in it. When he's done with school I'll hand over what's left if there is any. It wouldn't have been my choice of savings vehicles, but the grandparents opened and funded it and I wasn't about to do the looking a gift horse in the mouth thing.

My parents held an UTMA for my brother for a long, long time. He had some insurance payout when he was a baby and he was not a responsible kid in his late teens/early 20's. Handing him a lump sum of money would not have ended well. They did give him a chunk of it (probably over half) and he bought a sports car and moved to FL for a year and never got a job while down there. Brother thought the money was gone until he needed a down payment for a house, then they gave him the rest.

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Re: UTMA accounts

Post by Spirit Rider » Tue Oct 01, 2019 7:07 am

stilllurking wrote:
Mon Sep 30, 2019 1:48 pm
*IF* I were to open a UTMA for my kids, is the dividends and interest receive taxable at my rate or theirs? (i.e. I would need to file a return in their name to account for the earnings in the account?)
Effective 1/1/2018, unearned income subject to "Kiddie Taxes", is no longer taxed at the parent's marginal tax rates.

In 2019, up to $1,100 is tax-free and the next $1,100 is subject to taxation at the UTMA owner's tax rates. After the first $2,200, the reminder is taxed at trust marginal rates.

stilllurking
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Re: UTMA accounts

Post by stilllurking » Tue Oct 01, 2019 7:17 am

Thanks Spirit Rider.

I assume I would still get a 1099 for the unearned income. Is there a special form they give to shows the income came from a UTMA so that it doesn't get taxed on my return?


Thanks Grt2bOutdoors.
If you are holding the money in a regular brokerage account in your name, then you are the owner of the assets. There is no law on when/if you should transfer assets, you own them. Depends on the size of the account at the time of transfer - if you are gifting $1 million dollars, you might have a gift tax issue.
I totally understand that there is no law for transferring assets from my brokerage account. Bad choice of words in my post. What I meant to say was when I do decide to transfer the assets to them, is it a sell on my part (that triggers capital gains)? Or can I say transfer these shares in-kind to junior's account? Would there be tax implications with the latter for me?

Spirit Rider
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Re: UTMA accounts

Post by Spirit Rider » Tue Oct 01, 2019 7:55 am

stilllurking wrote:
Tue Oct 01, 2019 7:17 am
I assume I would still get a 1099 for the unearned income. Is there a special form they give to shows the income came from a UTMA so that it doesn't get taxed on my return?
The 1099-R for a UTMA account will be issued in the account owner's name and SSN, not yours.
What I meant to say was when I do decide to transfer the assets to them, is it a sell on my part (that triggers capital gains)? Or can I say transfer these shares in-kind to junior's account? Would there be tax implications with the latter for me?
You can gift shares in-kind. The recipient receives the same cost basis as you. Standard gift tax reporting applies. No reporting is required if the current FMV is <= the annual exclusion (2019 = $15K). Amounts > this must be reported on Form 709 and applied against the lifetime exclusion (2019 = $11.4M). Gift taxes are only required after you exceed the lifetime exclusion.

The recipient receives the same cost basis as you. The recipient is the only one subject to income taxes on any distributions or sales.

stilllurking
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Re: UTMA accounts

Post by stilllurking » Tue Oct 01, 2019 8:20 am

Thanks Spirit Rider! I appreciate your explanation and all of your contributions on BH.

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dm200
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Re: UTMA accounts

Post by dm200 » Tue Oct 01, 2019 8:36 am

SGM wrote:
Mon Oct 16, 2017 10:07 am
I have been trying to get my children to take over their UTMA accounts. I have warned them that if they do not change the account registration, the accounts will revert back into my estate at death. They seem to be too busy working. I cannot transfer the accounts without their signatures either medallion or just signature guaranteed. I think I will get a Vanguard financial advisor to speak to them and maybe start managing their accounts.
I am in this business - dealing with Virginia UTMAs. ONLY the custodian can change ownership or release the funds. The "minors" cannot do it themselves. An exception might be if the custodian is deceased or not available.

rashad3000
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Re: UTMA accounts

Post by rashad3000 » Tue Oct 01, 2019 9:17 am

Question:

What if you simply don't tell your kids about these accounts until they turn 25?

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dm200
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Re: UTMA accounts

Post by dm200 » Tue Oct 01, 2019 9:31 am

rashad3000 wrote:
Tue Oct 01, 2019 9:17 am
Question:
What if you simply don't tell your kids about these accounts until they turn 25?
I assume (correct me if I am wrong) that you mean the required age (state specific) which can be as young as 18 or as old as 25 - again depending on applicable state law.

I do not think it is a requirement to tell the "minor" about the account. HOWEVER, earnings on a UTMA are taxable to the "minor" - so if the UTMA results in having to file a tax return - the minor would have to know.

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Re: UTMA accounts

Post by Spirit Rider » Tue Oct 01, 2019 10:07 am

rashad3000 wrote:
Tue Oct 01, 2019 9:17 am
What if you simply don't tell your kids about these accounts until they turn 25?
While there is no UTMA police, you have a moral, ethical and fiduciary responsibility to remove yourself as custodian after the age of termination. The actual UTMA statutes state that you shall remove yourself as custodian after the date of termination.

That is not to say that you can't temporarily delay removing yourself as custodian if you have a reasonable cause that is in the account owner's best interest (drug abuse, in a cult, etc...). The account owner wanting to by a new car after college graduation is not a reasonable cause. I.e., you can't substitute your view of frugality for their personal finance decisions. The very second they were given the money it became 100% their money.

P.S. There are 8-9 states and counting that now allow the age of termination to be set at age 25.

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Re: UTMA accounts

Post by Spirit Rider » Tue Oct 01, 2019 10:11 am

Spirit Rider wrote:
Tue Oct 01, 2019 10:07 am
rashad3000 wrote:
Tue Oct 01, 2019 9:17 am
What if you simply don't tell your kids about these accounts until they turn 25?
It is your obligation to tell them about the UTMA account when they become adults responsible for their own tax returns and are required to file a return. The Form 1099-R is reported on their SSN and they have the tax liability.

While there is no UTMA police, you have a moral, ethical and fiduciary responsibility to remove yourself as custodian after the age of termination. The actual UTMA statutes state that you shall remove yourself as custodian after the date of termination.

That is not to say that you can't temporarily delay removing yourself as custodian if you have a reasonable cause that is in the account owner's best interest (drug abuse, in a cult, etc...). The account owner wanting to by a new car after college graduation is not a reasonable cause. I.e., you can't substitute your view of frugality for their personal finance decisions. The very second they were given the money it became 100% their money.

P.S. There are 8-9 states and counting that now allow the age of termination to be set at age 25.

Spirit Rider
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Re: UTMA accounts

Post by Spirit Rider » Tue Oct 01, 2019 10:11 am

rashad3000 wrote:
Tue Oct 01, 2019 9:17 am
What if you simply don't tell your kids about these accounts until they turn 25?
It is your obligation to tell them about the UTMA account when they become adults responsible for their own tax returns and are required to file a return. The Form 1099-R is reported on their SSN and they have the tax liability.

While there is no UTMA police, you have a moral, ethical and fiduciary responsibility to remove yourself as custodian after the age of termination. The actual UTMA statutes state that you shall remove yourself as custodian after the date of termination.

That is not to say that you can't temporarily delay removing yourself as custodian if you have a reasonable cause that is in the account owner's best interest (drug abuse, in a cult, etc...). The account owner wanting to by a new car after college graduation is not a reasonable cause. I.e., you can't substitute your view of frugality for their personal finance decisions. The very second they were given the money it became 100% their money.

P.S. There are 8-9 states and counting that now allow the age of termination to be set at age 25.

aristotelian
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Re: UTMA accounts

Post by aristotelian » Tue Oct 01, 2019 10:29 am

rashad3000 wrote:
Tue Oct 01, 2019 9:17 am
Question:

What if you simply don't tell your kids about these accounts until they turn 25?
Aside from setting up a potentially toxic dynamic in the relationship, I would think the kid is likely to find out when they start getting statements. If you intercept the statements, add mail tampering to breach of fiduciary duty in the potential lawsuit and/or criminal trial.

baseball2horse
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Re: UTMA accounts

Post by baseball2horse » Tue Oct 01, 2019 3:31 pm

I'll just share my perspective as a kid who received a fairly large (200k ) UTMA account post college.

First, I had no idea that this account existed until pretty much right when we signed the papers transfering it over. my parents paid for all of college (for me and my brother) and how they accomplished that, and accounts was just not something I thought about/asked about or was ever really discussed.

So after going to an instate school and getting scholarships there was a fair bit of money left over. Luckily I was a fairly responsible kid so I just left it sitting there, and invested more in it with my first job post college. Two years later I used most of it to pay for a very large down payment on a house (I live in a HCOL). Having the down payment allowed me to get in on a riding market while still keep cash flow low. It felt a little better knowing that this was money my parents had to give to me because I didn't spend it all on college, verse them just gifting me money for a down payment.

Obviously YMMV but it worked out very well me, and I am so very grateful to my parents for it.

SGM
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Re: UTMA accounts

Post by SGM » Wed Oct 02, 2019 10:20 am

dm200 wrote:
Tue Oct 01, 2019 8:36 am
SGM wrote:
Mon Oct 16, 2017 10:07 am
I have been trying to get my children to take over their UTMA accounts. I have warned them that if they do not change the account registration, the accounts will revert back into my estate at death. They seem to be too busy working. I cannot transfer the accounts without their signatures either medallion or just signature guaranteed. I think I will get a Vanguard financial advisor to speak to them and maybe start managing their accounts.
I am in this business - dealing with Virginia UTMAs. ONLY the custodian can change ownership or release the funds. The "minors" cannot do it themselves. An exception might be if the custodian is deceased or not available.
I have been told by two different brokerages that the grown children need to fill out the paper work to open their own accounts. I cannot make the change without their cooperation.

Spirit Rider
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Re: UTMA accounts

Post by Spirit Rider » Wed Oct 02, 2019 10:40 am

SGM wrote:
Wed Oct 02, 2019 10:20 am
dm200 wrote:
Tue Oct 01, 2019 8:36 am
SGM wrote:
Mon Oct 16, 2017 10:07 am
I have been trying to get my children to take over their UTMA accounts. I have warned them that if they do not change the account registration, the accounts will revert back into my estate at death. They seem to be too busy working. I cannot transfer the accounts without their signatures either medallion or just signature guaranteed.* I think I will get a Vanguard financial advisor to speak to them and maybe start managing their accounts.
I am in this business - dealing with Virginia UTMAs. ONLY the custodian can change ownership or release the funds. The "minors" cannot do it themselves. An exception might be if the custodian is deceased or not available.
I have been told by two different brokerages that the grown children need to fill out the paper work to open their own accounts. I cannot make the change without their cooperation.
The problem as in @SGM's case, is that most brokerage's platforms do not support changing a UTMA account to a standard account. Yes, the custodian is the only one who can release their control and transfer funds, but the funds often have to go to a new account opened by the UTMA account owner. Only that individual can apply to open that account and *positively identify themselves as the UTMA account owner to receive the transfer.

Sales6280
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Re: UTMA accounts

Post by Sales6280 » Mon Oct 21, 2019 9:45 am

Question about UTMA account taxes.

I have a Vanguard UTMA for my child that should be around $50,000 at the age of 18. Once the child takes ownership of the account, assuming no earned income, would she be able to liquidate the account tax free? The way I am reading the tax code she could liquidate the entire account with lets say $40,000+ in capital gains and pay no tax since the capital gains tax is 0% for earned income under $39,375?

This of course assumes the current tax code is the same at that time.

Spirit Rider
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Re: UTMA accounts

Post by Spirit Rider » Mon Oct 21, 2019 11:49 am

@Sales6280

You need to educate yourself about the "Kiddie Tax" rules, but first to your statement about 0% capital gains tax rate <== $39,375.

That rate is not on earned income. As the name itself indicates, it only applies to "unearned" long-term capital gains and qualified dividends. Then it only applies to the LTCG/QDIV portion of your total taxable income <= $39,375. Earned income and other unearned income subject to ordinary income taxes reduce the amount available at the 0% LTCG/QDIV rate.

Kiddie Taxes apply to minor dependents < age 19 and college dependents < age 24. If a 21 year old college student received control of a UTMA and had $39,375 in LTCG/QDIV, the taxes would not $0. As would be likely their earned income is >= $750 and <= $12,200. They would only have a $350 standard deduction to apply against unearned income.

The remainder of $2,200 would taxed at their tax rates and the amount above that would be taxed at trust tax rates. They might be able to only pay 0% LTCG/QDIV taxes on the first $4,850. They would pay, 15% on the next ~$10,000 and 23.8% after that. When the UTMA account owner graduates they are no longer subject to the Kiddie Taxes, but they may have >= $39,375 in income subject to ordinary income taxes. That would mean they would not have any 0% LTCG/QDIV tax bracket available.

Luckily, while the Kiddie Taxes rates can be both a curse, they can also be a blessing. If you instead tax gain harvest the UTMA account every year up to the top of the first trust tax bracket. They could pay no taxes on the first $4,850 (2019). To accomplish this, you need to have tax efficient investments in the UTMA. This could quite likely result in their being little to no unrealized capital gains when you release control.

Sales6280
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Re: UTMA accounts

Post by Sales6280 » Mon Oct 21, 2019 12:55 pm

I understand the kiddie tax rule. The idea here is to add funds to the UTMA yearly for the next 18 years. During that time sell nothing and limit gains to dividends which would likely fall below the kiddie tax threshold.

At year 18, hand over the UTMA to my child. Lets say at that time she has no income and liquidates the UTMA for a $39,000 long term capital gain. Her income tax would be $0, correct?

Spirit Rider
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Re: UTMA accounts

Post by Spirit Rider » Mon Oct 21, 2019 8:54 pm

Sales6280 wrote:
Mon Oct 21, 2019 12:55 pm
I understand the kiddie tax rule. The idea here is to add funds to the UTMA yearly for the next 18 years. During that time sell nothing and limit gains to dividends which would likely fall below the kiddie tax threshold.

At year 18, hand over the UTMA to my child. Lets say at that time she has no income and liquidates the UTMA for a $39,000 long term capital gain. Her income tax would be $0, correct?
You do not understand the Kiddie Tax rules and took no understanding away from my post. What you want to do is the worst possible way to use a UTMA account.

At 18, the Kiddie Tax rules would apply, NOT general tax brackets. In 2019 the first $10,300 in LTCG/QDIV > the total unearned income of $4,850 will subject to a 15% LTCG/QDIV tax rate. The amount > this will be subject to a 20% LTCG/QDIV rate plus the 3.8% NIIT. The Kiddie Taxes on 38,950 would be a minimum of ($10,300 * 15% = $1,545) + ($26,000 * 23.8% = $6,188) = $7,733.

However, as I already pointed out, you can tax gain harvest (sell and re-buy appreciated securities) to realize up to $4,850 (2019) in tax-free increase in basis every year. Then whenever the UTMA is released to the UTMA account owner there is little to no unrealized capital gains.

In fact, I consider any UTMA custodian who does not tax gain harvest up to the tax-free limit every year. Is in material violation of their fiduciary duty to subject the UTMA account owner to unnecessary unrealized capital gains.

3Fund4Life
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Re: UTMA accounts

Post by 3Fund4Life » Mon Oct 21, 2019 10:39 pm

Spirit Rider,

Thank you very much for your explanation of tax gain harvesting in the context of UTMA accounts. In conjunction with your posts, I reviewed IRS Topic No. 553 – tax on a child investment and other unearned income (Kiddie Tax) as well as the 2018 IRS form 8615 instructions. Based on this information, could you please confirm my understanding (or lack) of tax gain harvesting:

1. Reviewing IRS topic 553, my understanding is that if the child has unearned income, the first $2100 is not taxed.

2. Subsequently, after reviewing form 8615 instructions, my understanding is that all net unearned income over $2100 (2018) is taxed using the brackets in rates for estates and trusts. Using the table provided, it appears that the next $2550 (2018) of unearned income is not taxable.

3. Adding these two amounts together, I come up with $4650 (2018). From your above post, I am assuming that for 2019, the total amount is raised to $4850.

4. If the above is true, my understanding is that I can tax gain harvest up to $4850 worth of long-term gains without the child owing any taxes.

Is my summary accurate?

Thank you.
Nobody knows nothing

inbox788
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Re: UTMA accounts

Post by inbox788 » Mon Oct 21, 2019 11:33 pm

Spirit Rider wrote:
Mon Oct 21, 2019 11:49 am
That rate is not on earned income. As the name itself indicates, it only applies to "unearned" long-term capital gains and qualified dividends. Then it only applies to the LTCG/QDIV portion of your total taxable income <= $39,375. Earned income and other unearned income subject to ordinary income taxes reduce the amount available at the 0% LTCG/QDIV rate.

Kiddie Taxes apply to minor dependents < age 19 and college dependents < age 24. If a 21 year old college student received control of a UTMA and had $39,375 in LTCG/QDIV, the taxes would not $0. As would be likely their earned income is >= $750 and <= $12,200. They would only have a $350 standard deduction to apply against unearned income.

The remainder of $2,200 would taxed at their tax rates and the amount above that would be taxed at trust tax rates. They might be able to only pay 0% LTCG/QDIV taxes on the first $4,850. They would pay, 15% on the next ~$10,000 and 23.8% after that. When the UTMA account owner graduates they are no longer subject to the Kiddie Taxes, but they may have >= $39,375 in income subject to ordinary income taxes. That would mean they would not have any 0% LTCG/QDIV tax bracket available.

Luckily, while the Kiddie Taxes rates can be both a curse, they can also be a blessing. If you instead tax gain harvest the UTMA account every year up to the top of the first trust tax bracket. They could pay no taxes on the first $4,850 (2019). To accomplish this, you need to have tax efficient investments in the UTMA. This could quite likely result in their being little to no unrealized capital gains when you release control.
Thank you for your contributions and the recent update. I was composing a reply to another old thread and got called away before finishing, but here it is with a correction.

viewtopic.php?f=2&t=267470
Spirit Rider wrote:
Mon Dec 24, 2018 7:35 pm
  • The 2018 unearned income standard deduction = ($1050 - the first $700 in earned income) - (the first $350 in earned income > $11,650)
  • The next $2100 - the unearned income standard deduction is taxed at the dependent's tax rates
    • Ordinary income 10% tax rate
    • Capital gains 0% tax rate
  • The amounts > $2100 are taxed at trust tax rates. This first bracket is:
    • Ordinary income up to $2550 10% tax rate
    • Capital gains up to $2600 0% tax rate
Therefore up to $2100 + $2600 = $4700 in capital gains can be be tax free.

As I pointed out above this will depend on any amount of ordinary income. The tax on any ordinary income will depend on the amount and the unearned income standard deduction.
Been searching a long time for this answer!

Thank you!

Tax liability on going over $4700 is 15% capital gains, right? And not marginal, so somewhat heavy penalty for miscalculating and going over. [misunderstanding? Now think it's simply marginal, which makes going over a little no big deal. Those very wealthy and expect a lifetime higher than 15% might fill it to the top, which is about $10k additional as I'm understanding, but that would be extremely rare and/or unusually large accounts.]

No way to avoid child filing federal taxes now, right? And also state taxes (CA), but there should be some benefit there too. Anyone know those thresholds, amounts or limits?
GreatOdinsRaven wrote:
Sun Dec 30, 2018 10:05 am
indexonlyplease wrote:
Sun Dec 30, 2018 8:47 am
The question I just thought of. What is advantage of the UTMA if you have to worry about kittie taxes, capital gains, dividend act. Would it be better for someone to just put the funds in the childs name and fund it?

Except that the child can't touch it until 21 (Florida)
In Florida there is the possibility to extend it from 21 to 25 years of age.
The 30 day window is contrived, but I guess necessary to comply with the age 21 requirements.

Now if only there was a similar statue in California. viewtopic.php?t=240570

Spirit Rider
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Re: UTMA accounts

Post by Spirit Rider » Tue Oct 22, 2019 12:20 am

Here are the 2019 Kiddie Tax rules.

With no earned income*, there is a $1,100 unearned income standard deduction. The first $1,100 of ordinary income and/or capital gains is tax free. The next $1,100 is subject the dependent's tax rates. The ordinary income tax rate is 10% and the capital gains tax rate is 0%. Unearned income > $2,200 is subject to trust tax brackets.

There are small differences between the trust ordinary income tax brackets and capital gains tax brackets. This is also true of personal ordinary income tax brackets and capital gains brackets. The first trust ordinary income tax bracket is $2,600 and the first capital gains tax bracket is $2,650. Therefore, up to the first $4,850 in unearned ordinary income <= the unearned income standard deduction and/or unearned capital gains can be tax free.

*With earned income, the first $750 of earned income reduces the unearned income standard deduction dollar for dollar down to $350. When the earned income is > ($12,200 - $350 = $11,850), $350 of earned income reduces the unearned income standard deduction dollar for dollar down to $0. The amount subject to the dependent's tax rates is always $2,200 - the unearned income standard deduction.

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CyclingDuo
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Re: UTMA accounts

Post by CyclingDuo » Tue Oct 22, 2019 7:17 am

bampf wrote:
Mon Oct 16, 2017 10:41 am

Do they know about it? The monies are technically theirs, it was an irrevocable gift.
They don't really know about it. They know we have put aside monies but not how much. We have always said it would be for school, first house and that sort of thing.

Thanks again!
For future parents considering UTMA accounts...

We "invited" our children into knowing about their UTMA accounts very early on. That included the what, why, where, etc... of the investments and also used the opportunity as a learning tool for long term saving and investing.

Our advice is that it is well worth spending time during your children's youth helping to educate them about saving and investing, as well as continuing that process as they become young adults and go out into the work force after college.

CyclingDuo
"Everywhere is within walking distance if you have the time." ~ Steven Wright

afan
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Re: UTMA accounts

Post by afan » Tue Oct 22, 2019 8:26 am

Although we got lucky, if we had it to do over again we would not have used UTMAs. Forcing the money into the hands of a very young adult is a serious problem. Even if your kids turn out to be mature and responsible, using the money only for rational purposes, you give up asset protection. The money will be exposed to claims of creditors, predatory ex spouses, etc.

Far better to do a little more work at the start and set up conventional irrevocable trusts with yourself as trustee and the children as beneficiaries. You can give yourself the right to name successor trustees and this could include your children, with appropriate restrictions on their ability to make discretionary withdrawals.

Under this design nothing happens automatically at 18, 21 or whatever. You get to plan from their birth without having to worry about how responsible they will be when they become adults. You also give them as much protection as you can from others going after the money.

If you are gifting each kid $28,000 per year from birth, that will be a lot of money come age 20. It will cost some money to set up the trusts, but a small amount compared to even one year's gift and minuscule compare to the totals that will be in trusts after a few decades.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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dm200
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Re: UTMA accounts

Post by dm200 » Tue Oct 22, 2019 8:34 am

afan wrote:
Tue Oct 22, 2019 8:26 am
Although we got lucky, if we had it to do over again we would not have used UTMAs. Forcing the money into the hands of a very young adult is a serious problem. Even if your kids turn out to be mature and responsible, using the money only for rational purposes, you give up asset protection. The money will be exposed to claims of creditors, predatory ex spouses, etc.
Yes - I agree.

Where, in my opinion, UTMA or UGMA are ok would be for smaller amounts - that would not have these disadvantages.

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unclescrooge
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Re: UTMA accounts

Post by unclescrooge » Tue Oct 22, 2019 9:25 am

SGM wrote:
Mon Oct 16, 2017 10:07 am
I have been trying to get my children to take over their UTMA accounts. I have warned them that if they do not change the account registration, the accounts will revert back into my estate at death. They seem to be too busy working. I cannot transfer the accounts without their signatures either medallion or just signature guaranteed. I think I will get a Vanguard financial advisor to speak to them and maybe start managing their accounts.
My coworker went though the same issue with E-Trade. He was 26 and they still had his ugma account. A simple phone call and they converted it to a regular account.

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