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Merlo
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Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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When my husband and I divorced 6 years ago he set up an UTMA

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When my husband and I divorced 6 years ago he set up an UTMA for our child, then aged 2. He is the custodian of the account. Due to unemployment, he is unable to pay child support. Is it possible to liquidate the UTMA for the purposes of paying child support, and if so, what are the tax ramifications? The UTMA account is held in Texas.
Submitted: 7 years ago.
Category: Tax
Expert:  Merlo replied 7 years ago.
HelloCustomer

With a UTMA account, the child for whom the account was created actually owns the assets in that account, even though the child may not have actual control of the assets until they reach a certain age.

The custodian of that account may use the fund in the account for the benefit of the child. However, if your ex husband were to use the funds in that account to pay child support, the funds are actually benefiting him by satisifying his child support obligation. While they may be indirectly benefiting your child, the direct benefit would be to your husband, and this is his debt obligation. Therefore the withdrawal of funds for the purpose of child support would not be allowed.

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Thank youCustomer and let me know if you have more questions.
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Customer: replied 7 years ago.
What if the funds were used for child care or medical bills for the child?
Expert:  Merlo replied 7 years ago.
Hello againCustomer

One of the issues with these types of accounts is that the IRS provides no clear guidelines of how the account assets may be used for the benefit of a child. Here is how the rules read:

"A custodian may deliver or pay to the minor or expend for the minor's benefit so much of the custodial property as the custodian considers advisable for the use and benefit of the minor, without court order and without regard to (i) the duty or ability of the custodian personally or of any other person to support the minor, or (ii) any other income or property of the minor which may be applicable or available for that purpose."

Basically this is a very broad rule where the botXXXXX XXXXXne is that the expense must be for the minor's benefit. In the case of medical bills, this would obviously be a benefit for the child. However, in the case of child care expenses, here again while that is an indirect benefit for the child, it is really more of a direct benefit to the parent who needs the child care services so that they can work.

You would be safe to use the funds for anything which was of direct benefit to the child, such as medical bills, clothing, education, etc. So there are a number of things that you could actually earmark as being of benefit to the child.   Since your ex husband is the custodian of the account, he would be the one who needs to make the withdrawals. If he does make withdrawals to cover some of these allowed expenses, it would still not relieve him of or reduce his child support obligations.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank youCustomer



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