Convert former UGMA savings

My child has a somewhat large amount of money in a UGMA (from a grandparent) and will be turning 18 soon. We just discovered that her having this money will limit financial aid for college severely, but that if we (parents) had the money in our name, it wouldn't have to be spent all at once. We definitely have always planned to use it all for college, but it seems that over 4 years, we'll be elgible for less overall need-based financial aid if the money is in her name.

Legally, she can gift all of the money to us (losing some inheritance exemption) and have almost no assets at FAFSA time. She will also show no capital gains since she won't be selling the investments. We then would use the money over the next four years for her education. We would pay more in taxes at our rate on the dividends & capital gains, but we'd keep it longer to make more income.

Anyone know of any legal problems with doing this? Will the college financial aid offices find out about this and look unfavorably at it?

Please note we have no intention of spending the money for anything but her college education and could have easily requested that the money be gifted to us rather than her when this was done (so we wouldn't be in this situation at all).

Comments, ideas, criticisms welcome. We're just trying to get the most bang for our buck.

Thanks

Jtbear,

Why not give the UGMA to the grandparents? Grandparent's assets do not figure into financial aid in any way.

Here is a link to another thread on these boards that provides a link to FAFSA calculator. You may want to try some "what-if" sceinarios.
http://forums.kiplinger.com/forums/showthread.php?t=4204

Clydewolf is 100% correct. It's better than putting it your name.

Another strategy is to transfer the assets into a Roth IRA in your child's name. Roth IRAs are protected from the FAFSA calculations and you can access the principal (amount you put in) for any reason, any time, without tax or penalty. In the event you don't use it for college, it simply marches on, growing tax-exempt for your children's benefit. The only downside is the contribution limits ($4000 this year).

Also, because it is an IRA, it tends to have psychological factor that discourages your children from spending or liquidating the assets before 59.5 years old (even though they can).

Just so you are aware, the FAFSA is based on the year prior to applying, so you may have no way to minimize the damage in the first year.

Another strategy is to transfer the assets into a Roth IRA in your child's name. Roth IRAs are protected from the FAFSA calculations and you can access the principal (amount you put in) for any reason, any time, without tax or penalty. In the event you don't use it for college, it simply marches on, growing tax-exempt for your children's benefit. The only downside is the contribution limits ($4000 this year).

Also, because it is an IRA, it tends to have psychological factor that discourages your children from spending or liquidating the assets before 59.5 years old (even though they can).

Just so you are aware, the FAFSA is based on the year prior to applying, so you may have no way to minimize the damage in the first year.

Don't Roth IRA contributions have to be from earned income?

The UGMA was a gift, and investment or interest income in the account would be considered unearned income?

Joan,

You are correct, we need earned income to contribute to an IRA.

The fact that this was an UGMA, and can only be used for the benefit of the child, limits the things that can be done with the UGMA.

The OP has stated that this would go to fund college expenses, so really that is where it should go. Once the child reaches 18, they can spend it the way they want.
So perhaps this UGMA will not last long.....

People that have the funds for college and make manipulations to minimize the savings and investments that may qualify the student for financial aid are depriving some really needy student from some aid. Financial aid policies are there to provide needy students.

And to add, although you do need earned income to contribute to an IRA, the actual contribution can come from virtually anywhere. Most children have at least $4000 of earned income when they are approaching 18 years old (food service, babysitting, mowing, etc.). The child's earned income will also count against the aid, but that's no reason not to start transferring a lump sum from the UTMA/UGMA to a FAFSA protected account (Roth) that remains liquid. It will also give the child a leg up for the future.

Over 95% of UGMA’s are cashed in by the age of 25 – that’s why stock brokers refer to these as “Spring Break Accounts.” However, a trust, being its own legal entity, gives you the ability to set parameters on when assets are available and for what they can be used for. I transferred the UGMA’s for my children with a company called KissTrust for a $200 processing fee. This trust allows them to withdraw the amount I set for every semester and once their finished part of the balance can be used for their first home purchase, and the rest will be available when they are 60. It’s like a customizable UTMA, 529 and IRA all rolled into one. www.kisstrust.com