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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10172
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I had a question about UTMA accounts in CALIFORNIA.

Customer Question

Hello,
I had a question about UTMA accounts in CALIFORNIA. Long story short. My dad passed away 5 years ago and left his estate to my 8 year old son who is a minor. The jurisdiction of the case was held in New Jersey because my brother attested my father's will. Therefore, my son was assigned a guardian at litem in NJ to advocate on my sons behalf, to protect my son as the beneficiary of the will. I've been working closely with Guardian at litem in NJ and we finally sold my dad's house and my son will receive 74,000 to be distributed in an CUTMA account, naming myself as the Custodian of the account as he comes of adult age at 18. I realize that this is his money and as custodian, I am to manage the account in anyway that is to his benefit until he is 18, so as long as it DOES NOT ACCOUNT FOR MY LEGAL OBLIGATION TO PROVIDE FOR MY SON.
As I have limited understanding of an UTMA custodial account, I did my own research and found what is called the "UTMA regret," reading the pros and cons. I'm thinking about my son's future and I DO NOT want this account to impede on his financial aid eligibility in the future. Also there seems to be something called the "kiddie tax" or something that I would like you to clarify. Additionally, I was wondering if I could cash out the UTMA account, and put it somewhere else where I am able to withdraw money for his benefit, but I'm not even sure it this is legal? Also, I already opened an UTMA account with my name as custodian with Wells Fargo yesterday at request of my son's Guardian AT Litem. She is depositing the 74,000 tomorrow and I would like to withdraw 20,000 (a big chunk at one time in the next 2 weeks) to help pay for some equipment to accommodate for his disability that is not covered by his medical insurance BUT TO ALSO contract a worker to design in our backyard a play area/learning area/play equipment in our new home for him to enhance his learning and also help him cope with some of his symptoms. Right now, its just dirt and he gets sad he cant play outside since its not safe. My dad would have also wanted to give this gift to him if he were alive. Please help me and tell me how I can withdraw 20,000 in the next two weeks and where do I put the money - Do I transfer the money to our joint account? Or What should I do - Can I cash out the UTMA account? Do you recommend this?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.
Hi,.I'll start with your last question first (also the simplest piece here)..You cannot just cash out the account. An UTMA is an irrevocable gift. (Actually a very specialized type of irrevocable trust - Irrevocable trusts are used many times in estate planning because the UTMA makes it clear that the money is no longer that of the grantor).Here, it's likely being done for a similar reason, to be sure that the proceeds of the sale go TO, legally, irrevocably, your son. Not someone else..That being said, however, you as custodian DO have discretion to use the monty FOR his benefit.
Expert:  Lane replied 1 year ago.
Everyday expenses like food, clothing and shelter would not count (this is the issue you mention regarding your support of him) because a parent is expected to provide those things but "extras" like summer camp, a new computer, a car to get to a job, and expenses related to college visits would certainly be acceptable.
Expert:  Lane replied 1 year ago.
There ARE no special forms to fill out when you make a withdrawal from a UTMA ... SO I'd strongly recommend that you to keep a record of any withdrawals you make and save the camp and computer invoices so you can "prove" that the withdrawal was for a legitimate expense..The special needs issue is a no-brainer. This is over and above basic support and everything you're doing here is for his benefit.
Expert:  Lane replied 1 year ago.
A best practice that I always recommend to clients is to have an account that is separate from your every day joint or individual accounts ... to use as a "conduit" for funds that are going to be used for his benefit (really keeps you "bulle proof," in terms of any improper use ... and with the brother who contested the will it sounds like this MIGHT be something to keep on your radar screen). ... But, this is not a legal requirement ... The substance of the legal requirement is that the funds ultimately be used FOR HIS BENEFIT and NOT be basic support.
Expert:  Lane replied 1 year ago.
The starting point (for what's a proper expenditure) is section 14(a) of the Uniform Transfers to Minors Act, which says....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..So, as you can see, a very liberal standard.
Expert:  Lane replied 1 year ago.
Questions so far?
Expert:  Lane replied 1 year ago.
Ok, I still don't see you coming into the chat here, so I'll move on to the "Kiddie Tax" issues.
Expert:  Lane replied 1 year ago.
The kiddie tax isn't particular to UTMAs, it just applies..The kiddie tax is a set of special tax rules designed to dissuade a parent from transferring investments to his children to take advantage of his children's lower tax bracket..Under the kiddie tax, children pay tax at their own income tax rate on unearned income they receive up to a threshold amount ($2,100 in 2015; up from $2,000 in 2014). Here's the catch: All unearned income kids receive above the threshold amount is taxed at their parent's highest income tax rate (highest, simply becasue it's consiered to be on top of the income already there for the tax year)
Expert:  Lane replied 1 year ago.
This is the rule for ALL unearned income generated by assets in the child's name (UGMA, obviously in the childs name, or otherwise)
Expert:  Lane replied 1 year ago.
This "regret" stuff, in this expert's opinion, may or may NOT apply. If the issue is that it becomes the son's (actually already the son's but becomes his to CONTROL) at the age of majority, well that's just the nature of the beast ... if that's weren't the case, the assets WOULD be considered as part of the grantor's estate and there WOULDN'T be that issue of holding the custodian accountable for using the money only fo the childs benefit over and above the support that a parent should already be providing.
Expert:  Lane replied 1 year ago.
In my practice I have, last time I sorted my database, over 100 UTMA accounts ... Sometimes they just make sense ... and in THIS case it's there to protect YOU, in a way, to give YOU the ability to use this money for your son (rather than the dollars going to the brother or elsewhere)..I THINK I've touched on everything ... OH, one more thing.THe way this works in the real world, is the custodian (bank, broker, whomever) will have a code on the acc**t for the child's age of majority..In California ...Custodians may designate an age from 18 to 21.If no age is specified, the age of majority is 18.If the account assets came from a will, trust or insurance policy that specifies an age between 22 and 25, that age becomes the age of majority..But whatever this age code is (I've had to go out and have ownership change forms done, becasue the account is essentially suspended) will, at the child's attainment of that age, will no longer allow you to withdraw ... (and until an ownership change is done, the child will not be able to withdraw either)..So, good planning here is ... know what that time is, and use as much as possible FOR the child's benefit (that's the intent here) and then if there is money left - hopefully you've not let this sneak up on you, counseled well, and the child will make good decisions ... but at that point (IF there IS money left) it's his decision to make.
Expert:  Lane replied 1 year ago.
Pleas let me know what questions you may still have....I'll be here....Lane.If this HAS given you enough, I'd appreciate a positive rating, using the smiley faces or stars on your screen ... that's the ONLY WAY I'm credited for the work here..But again, I'll be watching for your questions ... let me know
Customer: replied 1 year ago.
Hello,I apologize. I just got back to my computer and will review it asap.
Expert:  Lane replied 1 year ago.
Sure thing ... I'll be here
Expert:  Lane replied 1 year ago.
Hi,
... just checking back in to see if you'd had that chance to review.
If you have questions let me know.
If this HAS given you enough, I would appreciate a positive rating (using the stars or smiley faces on your screen)… That’s the ONLY WAY I'll be credited for the work here, Thanks!
Lane
Expert:  Lane replied 1 year ago.
Hi,
I’m just checking back in to see how things are going.
Did my answer help?
Let me know…
Thanks
Lane
Expert:  Lane replied 1 year ago.
Hi,
... just checking back in to see if you'd had that chance to review.
If you have questions let me know.
If this HAS given you enough, I would appreciate a positive rating (using the stars or smiley faces on your screen)… That’s the ONLY WAY I'll be credited for the work here, Thanks!
Lane

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