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Moving UGMA/UTMA money into a 529
by Joe Hurley, founder,
Monday, February 13th 2006

If you are concerned with maximizing your child’s financial aid eligibility, consider moving her UGMA/UTMA money into a 529 savings plan or prepaid tuition plan. You’ll benefit from the recent changes made to the federal aid formula under the Deficit Reduction Act of 2005 (signed into law by President Bush on February 8, 2006).

Beginning July 1, 2006, UGMA/UTMA assets held within a 529 savings plan will no longer be included with other student-owned assets in the formula for determining a family’s “expected contribution” towards college costs. What used to count against aid eligibility at the rate of 35 percent will now be assessed at no more than 5.64 percent of value. The picture brightens even more considerably for families using a state-sponsored prepaid tuition plan or the private-college Independent 529 Plan. Instead of causing a dollar-for-dollar reduction in federal aid eligibility, prepaid plans will now share the same treatment as 529 savings plans.

Before these changes, some parents would attempt to convert 35-percent assets into 5.64-percent assets by transferring their children’s UGMA/UTMA assets into 529-plan accounts under their own names, and disregarding the specially-designated “custodial” accounts made available in most 529 plans. This questionable practice will no longer enhance aid eligibility. In fact, investments held in a parent-owned 529 account may receive LESS favorable treatment than investments in a custodial 529 account. Presumably, all of your parent-owned 529 accounts will have to be reported on the financial aid application of each of your children attending college, while it’s possible that a custodial 529 account will only have to be picked up for the particular child named on that account.

Does this mean that even if your child does not already have UGMA/UTMA money you should be establishing and making contributions to a custodial 529 account in his or her name instead of to your own 529 account? If you have more than one child to send to college and intend to apply for need-based aid, the answer could very well be “Yes.” However, this particular issue will remain unsettled until additional guidance is provided by the U.S. Department of Education discussing treatment of custodial versus parent-owned 529 accounts in families with more than one dependent child. There may also be some downsides to placing funds into a custodial 529 account. That account will be subject to special rules, including a restriction on changing beneficiaries, and will transfer to your child’s direct ownership when he or she reaches legal age (generally 18 or 21).

Here is another important issue that calls for some attention from the U.S. Department of Education: The new law specifies what the 529 account IS NOT (i.e. a student asset) but does not state what it IS. It would be logical to assume that you will have to treat both parent-owned and custodial 529 accounts as parental assets subject to the maximum 5.64 percent assessment rate.

If you decide to begin moving UGMA/UTMA assets into a 529 plan, remember that the 529 plan may only accept cash, and that any investments will first have to be liquidated and any gains or losses reported on the child’s income tax returns. The triggering of gains can affect financial aid eligibility since “base year” income is factored into the aid formulas. Your alternative is to keep the UGMA/UTMA assets outside the 529 plan, but perhaps look for ways to legally “spend-down” the assets prior to filing the FAFSA aid application. Even if you have UGMA/UTMA assets to report on the FAFSA application, their impact will be lower in the future: Beginning with the 2007-08 school year, the assessment rate on student assets drops from 35 percent to 20 percent.

» Claiming a state income tax deduction - 12/20/16
» Understanding 529 Investment Options - 12/13/16
» Should you open an UGMA/UTMA 529? - 02/06/08
» Understanding your state's slice of 529 fees - 12/13/07
» Planning for the new "kiddie tax" - 10/30/07
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