How to protect custodial account from college aid formula

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Q. y kids have money in custodial accounts and we were planning for them to use it for wedding costs eventually. But next year my oldest starts college, and we realize the money in the custodial accounts will count against him for financial aid. What can we do?

A. You’re correct in that custodial accounts — UTMAs or UGMAs — are considered assets of the student in the financial aid process. That means it’s expected that 20 percent of those funds are earmarked for college.

There are several options for the money, said Sheri Iannetta Cupo, a certified financial planner with SageBroadview Financial Planning in Morristown.

You can use the funds in the account for expenses that “benefit the child,” and that would decrease the account value, therefore less would count for college.

“It’s important to note that there might be capital gain on income from selling the assets and the child will likely be subject to the `kiddie tax’ on the sales,” Cupo said. “Be careful to time the sales so that the triggering of capital gains does not work against financial aid eligibility.”

She said if the student is a high school senior enrolling next year, or is a student already enrolled in college who qualifies for need-based aid, selling the asset will affect the student’s aid eligibility for the upcoming year, but not subsequent years, Cupo said.

Another alternative is the convert the money to a 529 Plan.

To do that, first, assets must be sold from the custodial account because you can only put cash into a 529 Plan, Cupo said. Depending on your timing, you could face the same challenge as if you’re just selling the account to spend on the child.

When the money is moved to the 529 Plan, it will be treated as an asset of the parent, which only counts from 2.6 to 5.6 percent as earmarked for college.

Cupo said a 529 plan inside an UGMA would still be subject to the rules of the UGMA. That means you can’t later change the beneficiary of that 529 Plan to another child.

Cupo said there’s another strategy.

You could deplete the UGMA, and then set the money aside in a separate account owned by you, and you could gift the funds to your child at a later date, she said.

It’s a complicated decision, so consider meeting with a pro that knows your entire financial situation before you make a move that can’t be undone.

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This story was first posted in September 2015. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.
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