UTMA Withdrawal Rules
billan...@sprintmail.com
Was wondering if anyone out there might have an idea what
the rules are concerning withdrawals from a child's
UTMA/UGMA custodial accounts. I have a UTMA account for my
child with a brokerage and have recently been successful
with some stocks and would like to use some of the gains as
a down payment on a house we have purchased. The only thing
my brokerage has been able to tell me is that I'll have to
be able to prove to the IRS that the withdrawals were for
the direct benefit of the child. I have been unable to find
any guidelines published by the IRS and believe it is more
of a legal matter with the state in which the UTMA is
registered (California).
I have several questions:
1. My brokerage will gladly cut me a check from the UTMA
account, but how can I be sure that what I'm using the money
for is acceptable to the overseeing governmental
organization (whichever that may be!)? I believe using some
money toward a down payment for the family house is in the
child's best interest because it helps keep the monthly
costs down, hence a better quality of life. But will the
government agency believe this is a suitable use?
2. The down payment happens to be less than $10,000 but if
I were to make a bigger downpayment and make a withdrawal
greater than $10,000 from the UTMA are there now Gift Tax
implications even though the money is coming from my child's
UTMA to her parents?
3. One of my daughters, because of the timing of the stock
trades made over the last 2 years, has more money in her
UTMA than the other daughter. Can I withdraw money from one
of the UTMAs to transfer to the other UTMA to "even them
out"?
If this isn't the appropriate forum for these questions I
apologize but would appreciate some help finding a forum
that can help me. Every search so far has led nowhere.
Thanks in advance.
--Bill
Hoffgeorge
> 1. My brokerage will gladly cut me a check from the UTMA
> account, but how can I be sure that what I'm using the money
> for is acceptable to the overseeing governmental
> organization (whichever that may be!)? I believe using some
> money toward a down payment for the family house is in the
> child's best interest because it helps keep the monthly
> costs down, hence a better quality of life. But will the
> government agency believe this is a suitable use?
>
> 2. The down payment happens to be less than $10,000 but if
> I were to make a bigger downpayment and make a withdrawal
> greater than $10,000 from the UTMA are there now Gift Tax
> implications even though the money is coming from my child's
> UTMA to her parents?
>
> 3. One of my daughters, because of the timing of the stock
> trades made over the last 2 years, has more money in her
> UTMA than the other daughter. Can I withdraw money from one
> of the UTMAs to transfer to the other UTMA to "even them
> out"?
Dear Bill,
This is a tough question without seeing the trust document
and reviewing the CA statute. I do significant amounts of
work in this area and each trust can be different within the
limits of the state law. Additionally, each state has
quirks in its version of the UTMA/UGMA.
Generally, (in Ohio) you cant touch the mone - however, some
in some cases I can draft a provision which allows the
grantor to substitute property of equal value. Some trusts
may contain borrowing provisions. Depending on how the trust
is drafted and the applicable provisions of California law
you may be able to direct the trust to purchase a portion of
the home.
With respect to equalization of beneficial interests again
this depends upon the trust document. Most of my trusts
provide for"separate shares" which are treated individually.
My advice here is to seek competent California legal counsel
to review the trust document and advise you regarding
permissible transactions in the trust. Very truly yours,
S/George L. Hoff.
Art Kamlet
> Was wondering if anyone out there might have an idea what
> the rules are concerning withdrawals from a child's
> UTMA/UGMA custodial accounts. I have a UTMA account for my
> child with a brokerage and have recently been successful
> with some stocks and would like to use some of the gains as
> a down payment on a house we have purchased. The only thing
> my brokerage has been able to tell me is that I'll have to
> be able to prove to the IRS that the withdrawals were for
> the direct benefit of the child. I have been unable to find
> any guidelines published by the IRS and believe it is more
> of a legal matter with the state in which the UTMA is
> registered (California).
>
> I have several questions:
You ask both a tax question and a legal question.
From a tax perspective, the UGMA allows you to act as
custodian for your child's benefit, and to manage the money
on her behalf. The income earned in that account is hers and
if high enough she files a tax return.
If you realy don't adhere to this, and keep the money for
yourself, you are not filing a correct return and in theory
the IRS oculd find you have broken the law in filing your
return and also find the income earned in the account is
yours and not your child's. (The latter is more likely.)
From a legal point of view, each state sets up rules for
UG/TMAs and you break state law if you fail to fulfill your
fiduciary duties. Taking money from her account and using
it for your house seems like you are violating your
fiduciary duties, and if the state wants to prosecute, it
might be called embezzlement. Will they? Not my call.
(Of course, posting such an article in a public forum
doesn't help :^)
> 1. My brokerage will gladly cut me a check from the UTMA
> account, but how can I be sure that what I'm using the money
> for is acceptable to the overseeing governmental
> organization (whichever that may be!)? I believe using some
> money toward a down payment for the family house is in the
> child's best interest because it helps keep the monthly
> costs down, hence a better quality of life. But will the
> government agency believe this is a suitable use?
And buying a Corvette to drive here to school is also in
her best interests, right? Answer to both questions: If
push came to shove will a jury believe that story?
> 3. One of my daughters, because of the timing of the stock
> trades made over the last 2 years, has more money in her
> UTMA than the other daughter. Can I withdraw money from one
> of the UTMAs to transfer to the other UTMA to "even them
> out"?
No. In your role as custodian for each child you
independently must manage that money for the best interests
of that child. Giving money to her sister is not in the best
interests of that child. If you want to start putting more
money in one UGMA than the other, eventually they will be
evened out.
DISCLAIMER: These are my personal opinions and not advice of any sort.
--
Art Kamlet Columbus, Ohio kam...@infinet.com
A.G. Kalman
> Was wondering if anyone out there might have an idea what
> the rules are concerning withdrawals from a child's
> UTMA/UGMA custodial accounts. I have a UTMA account for my
> child with a brokerage and have recently been successful
> with some stocks and would like to use some of the gains as
> a down payment on a house we have purchased. The only thing
> my brokerage has been able to tell me is that I'll have to
> be able to prove to the IRS that the withdrawals were for
> the direct benefit of the child. I have been unable to find
> any guidelines published by the IRS and believe it is more
> of a legal matter with the state in which the UTMA is
> registered (California).
>
> I have several questions:
>
> 1. My brokerage will gladly cut me a check from the UTMA
> account, but how can I be sure that what I'm using the money
> for is acceptable to the overseeing governmental
> organization (whichever that may be!)? I believe using some
> money toward a down payment for the family house is in the
> child's best interest because it helps keep the monthly
> costs down, hence a better quality of life. But will the
> government agency believe this is a suitable use?
>
> 2. The down payment happens to be less than $10,000 but if
> I were to make a bigger downpayment and make a withdrawal
> greater than $10,000 from the UTMA are there now Gift Tax
> implications even though the money is coming from my child's
> UTMA to her parents?
>
> 3. One of my daughters, because of the timing of the stock
> trades made over the last 2 years, has more money in her
> UTMA than the other daughter. Can I withdraw money from one
> of the UTMAs to transfer to the other UTMA to "even them
> out"?
>
> If this isn't the appropriate forum for these questions I
> apologize but would appreciate some help finding a forum
> that can help me. Every search so far has led nowhere.
> Thanks in advance.
In CA, the UTMA is part of the Probate Code. The
significant part of it's name is "Transfer." You are
transferring as a gift the amount in question. The assets
become the property of the minor. The appointed custodian
(generally a parent(s)) has a fiduciary responsibility to
manage those assets for the benefit of the minor.
Re Q3. You can not transfer money from one minor's account
to another minor's account without the approval of the
minor. Naturally, the minor must be capable of understanding
and making that decision. I can't tell you at what age that
decision making power is manifested. Note that in CA, the
Code does allow a minor upon reaching the age of 14 the
right to request all files and records and an accounting of
the account.
Re Q1 & 2. I am not versed in this area and have not read
any case material on this issue. That said, I do recall
reading an article on this subject and believe that the use
of the money to provide a down payment for a residence would
be construed to be in the child's interest and would benefit
the child. In other words, I don't believe you would be
breaching your fiduciary responsibility if you did this.
There is a separate issue as to how to classify the transfer
if the use of the money does not provide an ownership
interest in the real property with the child. It would thus
appear to be a gift from the child to the owner(s) of the
property. If it is a gift, then it would be subject to all
of the tax laws relative to gifts. If the child is given an
ownership for the investment, there are no gift issues.
I welcome some other opinions on this, from both a legal as
well as tax point of view.
--
Alan
My home page provides a variety of help and
information on tax related subjects.
http://pages.prodigy.net/agkalman/
http://www.geocities.com/WallStreet/District/4126/
billan...@sprintmail.com
Everybody so far has offered some really insightful advice
and I do appreciate it. Since I posted this I checked the
account statements and found that the UTMA accounts are
registered in Maryland, not California (but I don't believe
that makes much of a difference).
It sounds like I have some seemingly complex issues
regarding these UTMAs and probably need to spend the money
to get a lawyer's advice--something I was avoiding because
we don't have any liquid cash! (hence the need to withdraw
from the custodial accounts!) But I imagine the lawyer's
fees could be taken out of the UTMA account!
One thing I did read somewhere was that a UGMA is more
restrictive on what the money can be invested in whereas a
UTMA allows practically any type of investment including
family businesses and real estate. This tells me that if
the child had an ownership interest in the home we're
purchasing there should be no problem--however, this would
get too complicated for my blood and wouldn't even consider
it. Alan's suggestion that the child could provide as a
gift some money to be used as a down payment is interesting,
but sounds like it stretches the bounds of legality since
the money was originally "transferred" to my daughter and
now she's giving it back to me as a "gift"?
What really is frustrating about the whole thing is that
without this financial help from my 6-year-old daughter (due
to my luck in investing the money in stocks for her) we have
no money for a down payment and must also finance a huge 3%
VA funding fee that instantly gives us 3% negative equity in
our house. Paying 5% down not only gives us 5% equity but
also about $70/month lower mortgage payment AND reduces the
VA funding fee from 3% to 1.5% which reduces the monthly
payment even more. So using my daughter's money (just about
$9,000) can increase our quality of life by reducing our
monthly outflow significantly--and that's not in the child's
best interest? She'll get more educational toys that way!
Any more comments on this topic are quite welcome... Thanks
in advance!
--Bill
HW Skip Weldon
> What really is frustrating about the whole thing is that
> without this financial help from my 6-year-old daughter (due
> to my luck in investing the money in stocks for her) we have
> no money for a down payment and must also finance a huge 3%
> VA funding fee that instantly gives us 3% negative equity in
> our house. Paying 5% down not only gives us 5% equity but
> also about $70/month lower mortgage payment AND reduces the
> VA funding fee from 3% to 1.5% which reduces the monthly
> payment even more. So using my daughter's money (just about
> $9,000) can increase our quality of life by reducing our
> monthly outflow significantly--and that's not in the child's
> best interest? She'll get more educational toys that way!
>
> Any more comments on this topic are quite welcome... Thanks
> in advance!
Bill this won't help you, but your post is a not-so-gentle
reminder of the danger of taking irrevocable steps (be it
gifts like UGMA or some aspects of estate planning, without
understanding we live in a very uncertain world.)
Whenever someone asks me about such things, I tell them to
get back to me when they can say how long they will live,
and what it will cost. My view is that only then are they
in a position to consider irrevocable steps.
-HW "Skip" Weldon
Columbia, SC
Jim Davidson
> Any more comments on this topic are quite welcome... Thanks
> in advance!
My understanding (and it's only that) is that, as your
daughter's parent, you are *required* to provide her with
certain things, such as food and shelter.
The UTMA can't be used to pay for any of the required items,
so your new house wouldn't qualify. It can be used for
things like summer camp or, typically, college.
Someone with more legal background than me could elaborate,
but that's my understanding of the distinction. I'm
planning on using my daughter's UTMA for college, so I
haven't looked into it.
-Jim
Robert J. Romano
> without this financial help from my 6-year-old daughter (due
> to my luck in investing the money in stocks for her) we have
> no money for a down payment and must also finance a huge 3%
> VA funding fee that instantly gives us 3% negative equity in
> our house. Paying 5% down not only gives us 5% equity but
> also about $70/month lower mortgage payment AND reduces the
> VA funding fee from 3% to 1.5% which reduces the monthly
> payment even more. So using my daughter's money (just about
> $9,000) can increase our quality of life by reducing our
> monthly outflow significantly--and that's not in the child's
> best interest? She'll get more educational toys that way!
>
> in advance!
One creative way to accomplish your goals would be to set up
a family limited partnership (FLP) with you and your spouse
as general partners and your child as a limited partner.
You and your spouse will have full control of the assets in
the FLP, and your child will have no control. Yet the
UGMA/UTMA money from your child could be used to purchase
FLP "shares" in the child's name. Just beware of ALL the
tax effects of putting your home in an FLP and consult with
both a CPA and attorney before getting involved in FLPs.
--
Robert J. Romano, CPA
Arlington, Massachusetts
(781) 648-4966
http://home.sprynet.com/sprynet/rjromano
Edward Zollars
> Bill this won't help you, but your post is a not-so-gentle
> reminder of the danger of taking irrevocable steps (be it
> gifts like UGMA or some aspects of estate planning, without
> understanding we live in a very uncertain world.)
Usually the issues I see aren't that, but rather people that
want to create these irrevocable devices for some current
benefit, but then want to hold on to strings so they can undo
it. I have to tell them that, in most cases, you can have one
or the other, but not both.
> Whenever someone asks me about such things, I tell them to
> get back to me when they can say how long they will live,
> and what it will cost. My view is that only then are they
> in a position to consider irrevocable steps.
We all end up making some irrevocable decisions we may not like
down the road, since we are working from imperfect information.
All I ask, though, is that the client not try to figure out their
tax planning in hindsight 20 years down the line no matter which
way they decide to go now. The fact that you should have created
that irrevocable trust 10 years ago based on what happened this
week isn't relevant--at the time the decision was made, you had
to make a call based on the uncertainty.
It's kind of like clients who cry today about missing out of the
run up in the stock market in the past four years, but who were
too afraid of the risk of the market to actually buy equities
four years ago. You place your bets, you take your chances--and
not doing anything is just as much of a decision as any other.
--
Ed Zollars, CPA Phoenix, Arizona
ezo...@primenet.com
http://www.getnet.com/~hmtzcpas