UGMA vs UTMA vs Vanguard Confusion

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bertilak
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UGMA vs UTMA vs Vanguard Confusion

Post by bertilak » Mon Feb 12, 2018 6:27 pm

I'm considering starting my 5 and 7 year old grandkids' investment program so they have a head start on retirement savings at an early age. I was considering a UTMA over a UGMA because the money can be "locked away" until age 21 instead of age only 18 for a UGMA.

I went to VG's web page to investigate and was surprised to see that they only recommend either UGMA or UTMA as "college" savings. This kind of sets me back because I didn't want to address college costs -- others are doing that. Is three some reason NOT to use a UTMA for non-college costs?

Also there seems to be something different about UTMA gifts to grandchildren as opposed to children. There is something about generation skipping gifts. Most everything I read about (for example) tax consequences talks about the effect on parents, not grandparents. Is that just loose talk -- should they be talking about the gift-giver (parent or grandparent) and is only mentioning "parent" just loose talk?

There is a "generation skipping tax" but I think that has a high enough exemption (some millions of dollars?) that I don't need to worry about that aspect.

NOTE: I WILL RUN ALL THIS PAST AN ESTATE ATTORNEY. I am only asking here to make sure I can talk intelligently.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

Spirit Rider
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Re: UGMA vs UTMA vs Vanguard Confusion

Post by Spirit Rider » Tue Feb 13, 2018 2:06 am

You can not choose between a UGMA and a UTMA. It is based on your state law. Only South Carolina has not adopted UTMA accounts to supersede UGMA accounts.

A custodial account is necessary for any accounts for minors. What you choose to use them for is irrelevant. In fact if the family is on the bubble for receiving financial aid, having assets in a custodial account is the worst option. It will be assessed as an asset of the student at a 20% rate for the EFC.

The GST is more applicable to trusts. The GST/Gift tax are treated the same way. There is an annual exclusion (2018 = $15K) between each donor and each donee. Gifts greater than the annual exclusion is reported on Form 709. The excess is assessed against the unified GST/Gift and Estate tax currently $11.2M. Only if that amount is exceeded will there be any tax due.

gsmith
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Re: UGMA vs UTMA vs Vanguard Confusion

Post by gsmith » Tue Feb 13, 2018 2:26 am

UTMA/UGMA offers the least amount of control; it can't be spent on essentials and they have the right to do whatever they wish at age of majority. That could be wasted, or even harmful if they're not prudent.

If you're going to go this route, you might want to ask the parents to "hire" their child....
If it's a parent, then they don't have to pay Medicare or Social Security
With the earned income, the children could then open an Roth IRA and compound tax-free earnings all but guaranteeing financial freedom, assuming they don't do early distributions.

mega317
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Re: UGMA vs UTMA vs Vanguard Confusion

Post by mega317 » Tue Feb 13, 2018 4:13 am

UTMA being under college is just a quirk of the vanguard website.

SGM
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Re: UGMA vs UTMA vs Vanguard Confusion

Post by SGM » Tue Feb 13, 2018 5:21 am

We had set up both UTMAs and 529 accounts. The 529s are tax deferred or tax exempt depending how they are spent. The 529s have a penalty of 10% of earnings if used for non qualified purposes. Control of 529s are kept by the benefactor. Grandparents have also paid tuition and medical bills directly which is not limited by any tax law and does not count against the yearly maximum of gifts currently $15k per year per each grandparent for each individual.

Ask the estate attorney if the UTMA or UGMA will return to your estate if you die before they reach adulthood. Vanguard will probably allow you to set up an alternative custodian in the event of the death of the original custodian.

We did not apply for scholarships based on need, but I know of someone who transferred UTMAs to a different child when applying for scholarships and later transferred the UTMA back. It sounds dishonest to me, but I don't think it is illegal.

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bertilak
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Re: UGMA vs UTMA vs Vanguard Confusion

Post by bertilak » Tue Feb 13, 2018 12:56 pm

bertilak wrote:
Mon Feb 12, 2018 6:27 pm
I went to VG's web page to investigate and was surprised to see that they only recommend either UGMA or UTMA as "college" savings. This kind of sets me back because I didn't want to address college costs -- others are doing that. Is three some reason NOT to use a UTMA for non-college costs?
mega317 wrote:
Tue Feb 13, 2018 4:13 am
UTMA being under college is just a quirk of the vanguard website.
A VG rep confirms that the web page's equating/limiting UTMA/UGMA to college savings is simply a quirk/shortcoming of the web page and can be ignored.
Most everything I read about (for example) tax consequences talks about the effect on parents, not grandparents. Is that just loose talk -- should they be talking about the gift-giver (parent or grandparent) and is only mentioning "parent" just loose talk?
VG rep confirms that any UTMA tax consequences go to the parents no matter who funds it. Also, the Generation Skipping Tax is not a worry as long as the gift is below the $11+ million level. I think I will squeak in under that! :happy
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

Spirit Rider
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Re: UGMA vs UTMA vs Vanguard Confusion

Post by Spirit Rider » Tue Feb 13, 2018 3:12 pm

bertilak wrote:
Tue Feb 13, 2018 12:56 pm
VG rep confirms that any UTMA tax consequences go to the parents no matter who funds it.
That may procedurally be true, but UTMA tax consequences always fall on the beneficiary. The parents may pay the taxes and even include them on their return. They are always taxable to the beneficiary.

This can become very important when the custodian does not live with and/or is estranged from the beneficiary.

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