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Richard
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 47117
Experience:  29 years of experience as a tax, real estate, and business attorney.
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Is the distribution of an UTMA a taxable event that will produce

Customer Question

Is the distribution of an UTMA a taxable event that will produce a 1099? I'm not talking about the liquidation of the account, that has already occurred and will result in a taxable event - being paid by the custodian. I'm asking about the distribution of those funds now to another account. Thanks!
Submitted: 1 year ago.
Category: Tax
Expert:  Richard replied 1 year ago.
Welcome! My goal is to do my very best to understand your situation and to provide a full and complete answer for you.


Good afternoon. No...those funds are considered a gift to the child and held for the benefit of the child. As you reference, gains and/or income on the account are taxable, but the mere distribution of the funds...either directly to the child or transferring it to another account in the child's name is XXXXX XXXXX taxable event and there is no resulting tax.


Thank you so much for allowing me to help you with your questions. I have done my best to provide information which will be helpful to you. If I have not fully addressed your questions or if you have any follow up questions, or if I have misinterpreted your questions in any way, please do not rate me yet, but simply ask a follow up question without rating so I can provide you with a fully satisfactory answer. If I have fully answered your question(s) to your satisfaction, I would appreciate you rating my service with 3, 4, or 5 faces/stars so I can receive credit for helping you today. I thank you in advance for taking the time to provide me a positive rating!

Customer: replied 1 year ago.

Thank you - one more, if you don't mind. Our biggest concern here is avoiding a 1099 for the account holder (now 18 years old). Will the liquidation done earlier produce a 1099 for the acct holder? The custodian is willing to pay the taxes to help the acct holder - but we are mostly concerned with the reporting of these funds.

Expert:  Richard replied 1 year ago.
You're welcome and thanks so much for following up. The distribution of the account itself is not a taxable event and creates no tax. Investment income...income or capital gains on the assets....is taxable. Depending upon facts, these can be reported on the child's return or a parent's return. These rules are set forth in IRS Publiction 553 and are as follows (http://www.irs.gov/taxtopics/tc553.html):


"Topic 553 - Tax on a Child's Investment Income
The following two rules may affect the tax on the investment income of certain children:

If the child's interest, dividends, and other investment income total more than $1,900, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. See Form 8615 Instructions, Tax for Certain Children Who Have Investment Income of More Than $1,900, or
If the child's interest and dividend income (including capital gain distributions) total less than $9,500, the child's parent may be able to elect to include that income on the parent's return rather than file a return for the child. See Form 8814 (PDF), Parents Election To Report Child's Interest and Dividends.
For either rule to apply, the child must be required to file a return. See Publication 929, Tax Rules for Children and Dependents, for filing requirement information.

Part of a child's investment income may be taxed at the parent's tax rate if:

The child's investment income was more than $1,900
The child meets one of the following age requirements:
The child was under age 18 at the end of the tax year
The child was age 18 at the end of the tax year and the child's earned income does not exceed one-half of the child's own support for the year, or
The child was a full-time student who was under age 24 at the end of the tax year and the child's earned income does not exceed one half of the child's own support for the year (excluding scholarships)
At least one of the child's parents was alive at the end of the tax year
The child is required to file a tax return for the tax year, and
The child does not file a joint return for the tax year
The child's tax is figured on Form 8615 (PDF), Tax for Certain Children Who Have Investment Income of More Than $1,900. This form must be attached to the child's tax return.

A parent may be able to avoid having to file a tax return for the child by including the child's income on the parent's tax return. A parent can elect to do this if all of the following conditions are met:

At the end of the tax year the child was under age 19 or under age 24, if a full-time student
The child's interest and dividend income was less than $9,500 for the tax year
The child had income only from interest and dividends, which includes Alaska Permanent Fund dividends and capital gain distributions
No estimated tax payments were made for the tax year, and no prior tax year's tax overpayment was applied to the current tax year, under the child's name and social security number
No federal income tax was withheld from the child's income under backup withholding
The child is required to file a return unless the parent makes this election
The child does not file a joint return for the tax year
The parent is the parent qualified to make the election or files a joint return with the child's other parent."
Customer: replied 1 year ago.

Thank you - the parents are not in question here, but the grandparent (custodian), who is willing to pay the taxes on the gain realized at the liquidation of the UTMA - which is around $14,000 for the year. While the custodian/grandparent is willing to pay the taxes, nonetheless, the acct holder will be penalized if there is a 1099 issued to HER showing this gain. I guess what I'm trying to ask is the government going to produce a reviewable document (1099) that will be indicate these funds to any third party?

Expert:  Richard replied 1 year ago.
The 1099 is going to be issued to the person whose SSN is on the account. If that's the child's SSN, the income/gain 1099 will be issued to the child.
Customer: replied 1 year ago.

So, no matter what we do, if the child's SSN is on the account, this account and gain will show up. We are trying to move the funds into an insurance policy (which is allowed by law) for the child's long-term benefit.

Expert:  Richard replied 1 year ago.
Unfortunately so. I'm sorry. You might want to distribute the assets to the child and then have them contributed to a partnership in exchange for an interest in the partnership in a non-taxable transaction under Section 721. Then, carefully draft the allocation provisions in the Partnership Agreement to avoid him currently being allocated any gain/income under the Partnership. Eventually, you'll have to balance out capital accounts, but in the meantime, perhaps you can avoid any gain/income being reported to the child.
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 47117
Experience: 29 years of experience as a tax, real estate, and business attorney.
Richard and other Tax Specialists are ready to help you
Customer: replied 1 year ago.

We have an extremely interesting situation that you might want to know more about. I'm trying to get the best advice possible on how to proceed. The child is my daughter and the custodian my mother in law. I'm pulling my hair out about this trying to preserve child's assets for grad school. We have been advised to put the funds into a single premium life policy that can be cashed in after college to pay for grad school and that if we do this now, since the fafsa/etc reporting is finished for this year, we will be successful in sheltering the funds. I respect your time and appreciate your patience. If there is some way to speak with you off-line/private agreement, I would like that. This forum/comm method is extremely limiting. You have provided excellent service!

Expert:  Richard replied 1 year ago.
Thanks for replying and I wish I could communicate with you directly, but unfortunately, my terms of service with JustAnswer does not permit me to do so....I'm sorry! I would tend to avoid these policies for this purpose because you're paying a commission that you really need not pay and you're paying for an insurance component you really don't need either. If it's the income and gains on these you are worried about, you might consider putting the assets in growth funds that do not produce income/dividends. Then, when you need the funds, if you don't want to generate gains on sale for whatever reason, you can pledge these stocks to borrow the money which will not result in a taxable transaction.
Customer: replied 1 year ago.

We're not worried about the income/gains as much as the existence of the account itself. FAFSA requires reporting on such accounts, but reporting insurance polices are not required. We also don't want to convert to a 529 and lose 25 of the account for the next 4 years. We just found out about this custodial acct and are scrambling to shelter these funds, otherwise the university will eat them up in decreased aid - and they have billions in endowment and we're just middle class folks trying to find the funds for what we are already going to have to pay. Thanks for your help and original answer that the distribution of the UTMA is not itself a taxable event. Take care! (and Go Texas!)

Expert:  Richard replied 1 year ago.
Gotcha! I understand. You're very welcome..it's been my pleasure to help! Just graduated my last child....daughter...from UT! She had a great 4 years....studying and cheerleading! :) Best of luck to your child!
Customer: replied 1 year ago.

Thank you

Expert:  Richard replied 1 year ago.
Enjoy your holiday weekend!

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