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UTMA, good or not so good

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  •  spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1246
    Joined: 02/01/2016

    You can gift highly appreciated shares to a UTMA account, but it is subject to “Kiddie Tax” rules. You can only “harvest” up to $4700/year in capital gains depending on distributions and/or ordinary unearned income.

    Also, you need to understand this is an “irrevocable” gift to the minor. It is “their” money, not yours. You are only the custodian with a fiduciary responsibility to the owner. It is not some place for a tax dodge. That is what caused the Kiddie Tax rules in the first place.

    #171482 Reply
    Liked by royalblue
     pulmdoc 
    Participant
    Status: Physician
    Posts: 378
    Joined: 09/19/2016

    I have UTMA accounts for both my kids. Funded 100% by cash gifts from family/friends for Christmas/birthday etc. It’s already their money so it might as well earn a better return than if it was in savings account.

    #171511 Reply
    Liked by bean1970
     MnSaver 
    Participant
    Status: Other Professional
    Posts: 47
    Joined: 01/04/2018

    Our kids are 15 and we have no regrets, so far, on the UTMA journey. Our kids will get zero need-based aid for for college, so the UTMA became that parking spot for spare cash. By this age, I favor the 5 account approach where they have 529/UTMA/Roth/VG Deferred Annuity/Checking+Debit.

    #171539 Reply
    Liked by royalblue
     DCdoc 
    Participant
    Status: Physician
    Posts: 187
    Joined: 06/14/2016
    early retirement for doctors

    At what point do you need to file an individual tax return for the child? Do you need to do so if they only have a small amount of capital gains in the UTMA account?

    #171573 Reply
    q-school q-school 
    Participant
    Status: Physician
    Posts: 2003
    Joined: 05/07/2017

    Can anyone comment on experience with UTMA for kids with impulse control issues?  i have two kids, one who saves everything and one who seems genetically incapable of saving anything.  i feel that if i do UTMA for one I should do it for both, but I don’t think suddenly coming into possession of (tens of?) thousands of dollars at age 18 is good for the impulsive one.

    am i overthinking?

     

    #171576 Reply
     spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1246
    Joined: 02/01/2016

    You are not overthinking this at all. This is one of @jfoxcpacfp‘s major caveats about UTMA accounts. There are three ways to mitigate this.

    1. Work on the UTMA owner’s impulse control and financial responsibility, but there is no guarantee this will take.

    2. Even though it is usually referred to as Age of Majority that was for UGMA accounts. UTMA accounts have an Age of Termination. This is a state specified age that in the significant majority of states is age 21, with small number up to age 25. Check with your particular state’s statutes.

    3. I hate to mention this as it is prone to abuse. The custodian has a legal obligation to release control of a UTMA after age of termination. However, unlike UGMA accounts, the account owner does not receive automatic control. The vast majority of UTMA custodians will accept nothing less than formal release of control by the custodian or a court order.

    While it is not to the letter of the UTMA statutes, you could exercise some judgement FBO the account owner. After Age of Termination you might find yourself procrastinating while giving them training wheels (some discretionary control) over spending until they graduate college.

    Ultimately, you have no choice but to give them full control. If you really have spendthrift concerns you can instead uses a discretionary trust.

    #171578 Reply
     Kamban 
    Participant
    Status: Physician
    Posts: 1698
    Joined: 08/01/2016

    Can anyone comment on experience with UTMA for kids with impulse control issues? i have two kids, one who saves everything and one who seems genetically incapable of saving anything. i feel that if i do UTMA for one I should do it for both, but I don’t think suddenly coming into possession of (tens of?) thousands of dollars at age 18 is good for the impulsive one. am i overthinking?

    Click to expand…

    I also have a similar issue. In addition children can change from being an assiduous saver to a spender and vice versa. My daughter used to save every penny but this Black Friday she went out and bought art supplies, water bottles, sweaters with money she claimed were her own money. Basically money we handed to her and some she earned while working in my office.

    I had some concern initially but felt it was better to let them spend and learn to live within their means now rather than later. She claimed they were on Black Friday sales at Staples and Kohl’s ( at least they were not Nordstrom and Macy). I also feel that not everyone can be a frugal saver like many on this board and it is better to let children spend some and save some and learn to live a balanced life.

    One thing I am trying to teach is let her see the world and see how children in other countries live on so little and yet are contented. I sponsor charity for children and actively involve her with getting her input and discussing the amounts we should give that can make a change in the lives of others. I think this might help her from being monetarily extravagant and lead a middle of the road life, neither like MMM or like a Paris Hilton.

    #171579 Reply
     bean1970 
    Participant
    Status: Physician
    Posts: 291
    Joined: 07/12/2017

    At what point do you need to file an individual tax return for the child? Do you need to do so if they only have a small amount of capital gains in the UTMA account?

    Click to expand…

    Any one of these four requires a federal income tax return to be filed for a given year:
    The child has unearned income (from investment interest, gains, et al.) above $1,050.
    The child has earned income above $6,350.
    Gross income is greater than the larger of $1,050 or earned income (up to $6,000) plus $350.
    Net earnings from self-employment are $400 or more.
    Amounts shown are for 2018 (taxes due April 15, 2019). The IRS’ Publication 929, Tax Rules for Children and Dependents offers more details.

    If a child would be required to file a tax return but his or her only income consists of interest, dividends and capital gains (unearned income), parents may elect to include the child’s income on their own tax returns and avoid a separate filing.  Under the new tax bill, starting in 2018 until the end of 2025, this “kiddie tax” income will instead be taxed according to the trusts-and-estates brackets, which may be higher for some middle-income families where a child has significant unearned income (more than $12,500 hits the top bracket of 37%).

     

    #171580 Reply
     Kamban 
    Participant
    Status: Physician
    Posts: 1698
    Joined: 08/01/2016
    For those of you that opened UTMA accounts can you tell me the specific reason why you did it?

    Click to expand…

    Lifetime transfer of money excluding annual gift limits are constantly changing. One year it is $1M, next it is 3, then 5 and then 11 and again drops down. I don’t know what it it will be when I pass away. So I want to give the maximum allowed per year without affecting that amount.

    Currently it is $15K per annum. My wife and I have been giving the maximum allowed ( I think it was $10K or so when we started ) into a Vanguard account and investing in her index funds (no bonds). For 2018 it was $30K. My hope is that this will be her retirement fund in about 45-50 years time and that her earnings as an adult can be used for day to day living, buying house and paying it forward to her children.

    At least that is the game plan. Let us see what happens.

    #171584 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 3702
    Joined: 05/13/2011

    529 plans are underway and funded well. I’m thinking of starting UTMA accounts. So much info on these and I only understand tid bits of it. For those of you that opened UTMA accounts can you tell me the specific reason why you did it?

    Click to expand…

    Mine is a 20s fund to be used for missions, summer in Europe, cars, home down payments, weddings, honeymoons etc. It could be used for school too. Frankly, it can be used for anything the kid wants. It’s their money once they reach 21 in Utah. The idea is that money in your 20s is worth far more than money in your 50s or 60s so I’m giving them part of their inheritance early. Hopefully that’ll allow them to minimize the negative effects of debt in their financial journey.

    Think of it as a kid’s taxable account. If invested tax efficiently you can get $100K or more in there before any of the dividends/capital gains start being taxed at your rate.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #171588 Reply
    Craigy Craigy 
    Participant
    Status: Spouse
    Posts: 1659
    Joined: 09/16/2016

    Can anyone comment on experience with UTMA for kids with impulse control issues?  i have two kids, one who saves everything and one who seems genetically incapable of saving anything.  i feel that if i do UTMA for one I should do it for both, but I don’t think suddenly coming into possession of (tens of?) thousands of dollars at age 18 is good for the impulsive one.

    am i overthinking?

    Click to expand…

    You have to ask yourself if you want to actually make no-strings gifts (cash, UTMA, etc) or if you want to attach strings.  Attaching strings is what trust planning is all about.

    LEVEL 1 WCI FORUM MEMBER.

    #171605 Reply
    q-school q-school 
    Participant
    Status: Physician
    Posts: 2003
    Joined: 05/07/2017

    Can anyone comment on experience with UTMA for kids with impulse control issues?  i have two kids, one who saves everything and one who seems genetically incapable of saving anything.  i feel that if i do UTMA for one I should do it for both, but I don’t think suddenly coming into possession of (tens of?) thousands of dollars at age 18 is good for the impulsive one.

    am i overthinking?

    Click to expand…

    You have to ask yourself if you want to actually make no-strings gifts (cash, UTMA, etc) or if you want to attach strings.  Attaching strings is what trust planning is all about.

    Click to expand…

    pretty much don’t want to but when a lot of smart people other than me are doing it, I try to learn more about it and re-examine my own reasons.

    sometimes there are solutions to the problems I envision, or I didn’t fully understand the proposal.

    especially with money/tax stuff.  I was raised by wolves so I have to try and figure out the money tax/stuff as I go while working a more than full time job and parenting two kids.  sometimes my wife helps too.  🙂

    in considering it more carefully, I think the advantages are some tax savings and the costs are loss of control of money at age of majority.  is that right?

     

     

    #171620 Reply
    Liked by Craigy, G
     MnSaver 
    Participant
    Status: Other Professional
    Posts: 47
    Joined: 01/04/2018

    Correct. Making this no-strings gift is a crapshoot like most things in life. I wouldn’t do it for the tax savings, as once you cross 100K threshold as WCI noted the bill gets more significant plus you are doing extra 1040’s every year. Agree with Craigy-if you want control then you need to consider a real trust with defined ages (Like 25/30/35) or just use a 529. Another option is to fund Roth and fund a deferred annuity (low cost like VG) – at least they would pay a penalty for touching the money early.

    We spend a lot of time on financial education and have twins – one a stingy saver and one a generous spender. Our spender went out and got a job on his own (he informed us), did his W-4 and direct deposit himself, etc. said he realizes he spends more than his sister and wanted some work experience and some income coming in.

    We don’t know how this will turn out yet. I know people that have blown through their inheritance received in their 60’s, so I’m not sure age is the determinant of fiscal responsibility

    #171633 Reply
    Craigy Craigy 
    Participant
    Status: Spouse
    Posts: 1659
    Joined: 09/16/2016

    Can anyone comment on experience with UTMA for kids with impulse control issues?  i have two kids, one who saves everything and one who seems genetically incapable of saving anything.  i feel that if i do UTMA for one I should do it for both, but I don’t think suddenly coming into possession of (tens of?) thousands of dollars at age 18 is good for the impulsive one.

    am i overthinking?

    Click to expand…

    You have to ask yourself if you want to actually make no-strings gifts (cash, UTMA, etc) or if you want to attach strings.  Attaching strings is what trust planning is all about.

    Click to expand…

    pretty much don’t want to but when a lot of smart people other than me are doing it, I try to learn more about it and re-examine my own reasons.

    sometimes there are solutions to the problems I envision, or I didn’t fully understand the proposal.

    especially with money/tax stuff.  I was raised by wolves so I have to try and figure out the money tax/stuff as I go while working a more than full time job and parenting two kids.  sometimes my wife helps too.  🙂

    in considering it more carefully, I think the advantages are some tax savings and the costs are loss of control of money at age of majority.  is that right?

     

     

    Click to expand…

    Image result for romulus and remus

    LEVEL 1 WCI FORUM MEMBER.

    #171847 Reply
     Peds 
    Participant
    Status: Physician
    Posts: 2082
    Joined: 01/08/2016
    so I’m not sure age is the determinant of fiscal responsibility

    Click to expand…

    thank you.

    #171982 Reply

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