7 Hidden Setbacks to UTMA and UGMA Custodial Accounts

Posted by Ned Armand, President of Eastern Point Trust Company on Feb 10, 2016

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UTMA and UGMA accounts may look good on the outside, but parents should be aware of the many hidden disadvantages to these custodial accounts.

Key Takeaways

  • Custodial accounts have a number of limitations that could prevent your money from being used how you want                             
  • UTMA and UGMA custodial accounts can negatively impact a minor’s eligibility to financial aid
  • It is possible to roll UTMA and UGMA accounts into a Kiss Trust for minors

 

Explaining Custodial Accounts

UTMA and UGMA accounts are a popular option for investors to easily transfer large sums of money, real estate, or other inheritance to a minor without the need or expense of an attorney. While the accounts have some advantages, primarily their simplicity to establish, there are also a number of disadvantages that every investor (parent and guardian) should be aware of.

 

Disadvantages of UTMA and UGMA Accounts

While these accounts may have their advantages, here are the inconvenient disadvantages that could cost your child thousands in student loan debt:

  • By definition, these irrevocable trusts cannot be taken back by the Giftor. Once the assets are transferred to the minor, they belong to the minor. It is important for investors not to transfer funds that they may need to recover.
  • Regardless of the maturity level of the UGMA UTMA beneficiary, at age 18-21, depending on your state, the assets must transfer to the young adult at their request.
  • Assets in UTMA and UGMA accounts impact financial aid because the assets owned by the child are weighted more heavily than parental assets (according to Forbes, custodial accounts only make sense if you are certain your child will not need financial aid).
  • Money in a custodial account cannot be transferred to another child. The assets belong to one child only. This may impact families who are unable to give as much money to subsequent children as they were to for the first one.
  • Custodians have no control over how the funds are used, meaning that the child may use these assets for anything, even if the intent was to save for their education.
  • If the Giftor serves as the custodian and dies before the account matures, the assets in the account may be included among the custodian’s assets for estate tax purposes.
  • If the child dies prior to receiving the assets in the account, the accounts are dealt with according to the laws of the state, which may not be in your favor.
 
Know the Real Costs

Before opening a savings account for a minor, it is important to review disadvantages, as well as the advantages and consider alternatives. Even the best intentions can come back to haunt parents who establish UTMA or UGMA accounts who are poorly informed. Many financial institutions open these accounts without advising the custodian of their drawbacks and limitations. If parents have UTMA / UGMA accounts already established, some financial institutions offer opportunities to roll custodial accounts into alternatives such as an custom irrevocable trust.

 

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Tags: Student Financial Aid, Financial Aid, UGMA, UTMA

Maximize Student Financial Aid With an Irrevocable Trust In 3 Steps

Posted by Ned Armand, President of Eastern Point Trust Company on Nov 26, 2014

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Did you know that financial aid officers reduce the amount of financial aid if there are assets in the student’s name?


 

A Sea of Misinformation

Most individuals begin the process of applying for student financial aid at a great disadvantage. Did you know that the Federal Student Aid Handbook given to financial aid officers is over 950 pages long and provides for discretionary deviations by the officers? The information found in those weighty pages far exceeds the abbreviated and confusing instructions given to students when they apply. This system has been criticized as seemingly designed to withhold the facts and prevent deserving students from obtaining financial aid.

 

There Is Always A Way

There are ways to maximize financial aid without having to rely on the good intentions of a financial aid officer.  Financial aid instructions provide: “Trust funds in the name of a student, spouse, or parent should be reported as that person’s asset on the application.” This, by definition, would be a “Grantor Trust.” There are, however, other options: non-grantor irrevocable 3rd party trusts. By creating a non-grantor irrevocable 3rd party trust, assets can be held within the trust and then omitted from a student’s financial aid application. In an irrevocable 3rd party trust, the trust’s assets and income are owned by the trust and not the beneficiary’s. Thus, with the student having fewer or no assets to report, their Federal Student Financial Aid would increase!

 

1) Have A Strategy

If the student or parent(s) are worried about not reporting the trust on the financial aid form they can obtain a “Certified Statement of Valuation” provided by the Trustee which documents that:

  1. The Student Applicant (and their parents) are not the owners of the trust,

  2. The Trust is not in their name, and

  3. They have a zero ($0.00) current Net Present Value of vested beneficary rights under the plan. (Thus there are no trust assets to report.)

 

2) Increase By Reducing

Using the irrevocable trust to make loans is another creative strategy to maximize financial aid. If the trust makes scheduled distributions during the beneficiary’s tenure as a student, that student must report the distribution as income on their next year’s FAFSA form. That “deemed income” would most likely harm the student’s available financial aid for that next year.

However, if the trust had made a loan as mentioned above, the beneficiary would have no reportable income as loans are not income. Having the trust make loans to the beneficiary actually increases the beneficiary’s liability, in turn reducing the beneficiary’s reportable assets and net worth. With no or lower reported income, higher liabilities, and lower net worth, the financial aid is likely to improve when implementing this tactic.

 

3) Assess Your Situation

Individuals regardless of their income bracket, have successfully used and continue to use irrevocable 3rd party trusts to maximize financial aid under numerous circumstances. To assess your eligibility for a student financial aid increase, download our free student financial aid checklist below!

Download a Free FAFSA Checklist

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Tags: Irrevocable Trust, Student Financial Aid

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