A client of mine has a UTMA setup and is regretting she setup the account this way.
Assets put into a UTMA are irrevocable but if someone is experiencing "UTMA remorse" do they have any recourse?
Anyone have any experience with this type of situation?
This is a fairly easy question unless there is really a ton of money. Spend it. As long as the money benefits the child, it can really be spent on anything. For instance, when your client pays $3000 for her kid to go to summer camp this year, use the UTMA.
Ferris, it would still be an UTMA. It will be released at the age of majority when the kid says, “Send me a check. I want a new car.”
child is 16 and has a sizable amount (300K) in UTMA accounts. I am meeting with her tomorrow but I believe the father passed away and she was given advice at the time to put insurance settlement funds into the UTMA. I will get a refresher when I meet with her tomorrow. scrim
Why are they regretting it, and how old is the kid?
Yeah - you’ve got problems. It may have been avoidable ones, though. The beneficiary could have been the child & that was her only real choice. This is a very interesting case. Would you keep us informed as things occur with it, please?
I met with client and was careful to tell her that I can’t give her legal or tax advice. That being said, I told her the gift to the child was irrevocable. That was good enough for her and she took no action for now.scrim
Ferris, I'm sure that nobody will be the wiser, but you can't legally do what it sounds like you did.
Is this correct?:
Mom was custodian for an UGMA account for her child. The assets were sold and the proceeds were used to fund a 529 plan. Mom is the owner of the account. The child is the beneficiary. Later, more money was added.
It's not legal because the UGMA/UTMA account belongs to the child and must be used for their benefit. Once the money goes into a 529 account with the mother as the owner, the money belongs to the mother and she can use it for ANY purpose that she would like.
If on the other hand, the UGMA assets were sold and a 529 plan was purchased and it was an UGMA/529, this would be fine. Of course, any money added would belong to the child, and the child could still take this money and use it for ANY purpose when they reach the age of majority.
The only way to legally remove money from an UTMA/UGMA and move it into a parental owned 529 plan is to do it in two steps. 1) Spend down the UTMA/UGMA and 2)Replace this money by putting parental money in a 529 plan. This can be done by the parent tracking every dollar that they spend that benefits the child. Take the money out of the UTMA/UGMA and then take the same amount of money and put it in the parental owned 529 plan.
When she put over $300K into an UTMA, did she pay the gift taxes? Or, did it go against her lifetime credit. I don't think you can give someone $300K (even your own kid) with no tax ramifications.
Scrim, if she is worried about the kid blowing the money, she still may want to consider an aggressive spend down strategy. If he’s going to blow the money, the more that she can get out of the UTMA, the better.NowIndy, you are correct in your post that if she gave the money to the kid, she will either owe gift taxes or it will go against her lifetime credit. Based on Scrim's post, we don't know that she gave the money. It could have been, for example, a life insurance policy that named the kid as the beneficiary.
Another thought would be to set-up and fully fund a Roth IRA for the 16 year old for both 2007 and 2008, assuming he/she has earnings and mom is up for the idea. Continue doing so to the extent of any earnings over the next couple/few years.If this person is responsible and expects the UGMA to pay for college/graduate school then have a portion of these monies invested conservatively and (when the time comes) write checks for tuition/room and board to the instituion from this account.
[quote=anonymous]NowIndy, you are correct in your post that if she gave the money to the kid, she will either owe gift taxes or it will go against her lifetime credit. Based on Scrim's post, we don't know that she gave the money. It could have been, for example, a life insurance policy that named the kid as the beneficiary.[/quote] That's what I was thinking. However, if it was a life insurance settlement to the kid, could she have done anything OTHER than an UTMA? I would think that anything that takes it out of the kid's name would NOT be allowable. Now, she can take cash out to pay for private school, clothes, etc. for the kid, but she couldn't put the money in her name. If she did, the kid could sue her later for control (and probably win). Just my $.02
You can’t give a kid $300k without filing a Gift Tax return and using part of your lifetime credit, or (however unlikely) without paying gift tax. The money is stuck. Once it is an UTMA the treatment of the money is the same forever. True a long trail of jumping in and out of 529’s and adding other money could make it hard to figure out, but that would just be avoidance of the reality, it is the kid’s money legally even before they turn 18. Any lack of fiduciary responsibility on the parent could lead to them being sued by the kid. Then again the kid could clean up and turn out to be a future presidential candidate? (not sure that is much better)
Just an update:I meeting with this client tomorrow and she is expecting to liquidate a 250k utma account for her 17 yr old daughter so she can use the funds herself. She told me over the phone her accountant said it was ok to do this. I plan on having a conference call with the three of them tomorrow. My complaince dept. already told me that if she does liquidate and then bring back these funds for me to invest I must not open her a new account since i'm "in the know" and would be violating some kind of ethics code. I'm not sure why the accountant wouldn't tell her that wait until the child turns 18 and then have her give the money back to her. I'll let you know what transpires tomorrow. scrim
I would put a memo in the file at a minimum. I would rather have something in writing from my compliance department that they know what is going on, if you did the conversation by phone I would follow up with a confirmation email to them asking them to confirm. Then put that in the file.Even better is having the client sign something that she acknowledges that this is the daughter's money. This has lawsuit written all over it. When the daughter sues mom, mom will say that you said it was ok, and you want evidence that was not the case.
This woman needs to consult with an attorney before she does anything. Maybe she could have the money transfered into an irrevocable trust where the child is the beneficary with limited withdrawal privledges (spendthrift trust?).Your compliance dept. is correct.....stay away from this.