ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Monday, February 17, 1997 TAG: 9702190008
SECTION: MONEY PAGE: 6 EDITION: METRO
COLUMN: Money Matters
SOURCE: MAG POFF
Q: In 1990 we naively established a brokerage account under the Uniform Gifts to Minors Act for our newborn son as a college fund. We deposited $15,000 over the first two years. It has now grown to approximately $35,000 from growth and dividend reinvestment. We have paid taxes on the earnings and capital gains in my son's name every year since the account's inception.
Since that time, I have had second thoughts regarding the long-term wisdom of the UGMA approach. These misgivings were recently reinforced in a Money Matters column.
Is it possible to revert this account back to parental ownership? If so, what would be the implications with respect to taxes and/or penalties? Would there be any benefits to waiting until my son reaches 18 years of age and requesting (hoping) that he will return the account to us - if he is willing?
Q: I have some mutual funds under the Uniform Gifts to Minors Act for my grandchildren. Their mother is the custodian. Is it possible now to remove the children's names and Social Security numbers from these accounts and put the money back into their mother's name and Social Security number? What are the tax consequences?
A: Harry Rhodes, an estate and tax specialist with the Roanoke law firm of Bersch & Rhodes, said you are dealing with state law, not a tax issue. You pay taxes on the accounts according to the name under which they are registered. The government imposes no penalties for changing things around so long as it gets its taxes.
The problem, Rhodes said, is that you have made a so-called completed gift when you set up an account under the UGMA, which is now known as the Uniform Transfers to Minors Act, or UTMA. That means the gift was not contingent on any other event and it therefore belongs unconditionally to the child.
It also means it is difficult to make a change, as many people want to do. Rhodes said people with funds under this act become concerned about what a child might do if he or she comes into a large amount of money at the age of 18. The other reason, he said, is that there is very little tax advantage in having such an account for a child under the age of 14. That's because the child's interest or dividend income is taxed at the parents' rate.
Rhodes had two suggestions.
One is to give the money back to the parents as a gift at the rate of $10,000 a year. That means it would have no tax consequences. If there are two parents, the child can give $10,000 to each parent each year so that in the first instance the brokerage fund would be returned in two years.
The catch in this is to convince someone that a child of 6 is really giving a gift - presuming someone questions it in the first place.
His second suggestion is to change the account terms to a stipulation that the child cannot gain control of the money until the age of 21. This is possible under the act, and it would give you three more years of maturity. Meanwhile, you as custodian might spend the money for his benefit, such as on college tuition.
If the mutual fund or brokerage house balks at changing the account, Rhodes said, shift the money to another fund or brokerage using that condition.
Those are the legalities of your situations.
As a practical matter, however, nobody is policing these accounts. You do not have to make an accounting to any person or authority ever as to your handling of a UTMA account unless the child challenges you when he or she becomes an adult. That assumes the child knows about the terms of the account.
You should not have to answer to anyone if you move these accounts to the parents' names, keeping in mind the $10,000 gift limitation. People do it all the time.
LENGTH: Medium: 69 linesby CNB