Dale Stancil: ‘Now that we’re approaching the end of the year, I’d like your thoughts on choosing between contributing to a Uniform Minor Trust Account versus contributing to a Qualified State Tuition Plan as we plan for our sons’ college costs. (Ok, I confess, I’m hitting up the grandparents as well before the year ends). A plus of the UTMA seems to be a greater range of investment choices. Con is that the children can get their hands on it at age 18 (in our state). The biggest question I have is can a UTMA be later transferred into a QSTP by the custodian? We already have UTMAs funded for both our preschoolers, so the question now is to continue to contribute to those or start going with a QTSP.’

☞ This stuff sounds so dry until you make a poem or a cheer out of it. Picture 20 enthusiastic kids with pom-poms and a seal, at half-time,shouting:

UT-ma!
Q-stip!
Five two nine!
Savings plans are mighty fine!

COLL-ege costs
ROOM and board
How you gonna pay?
Either one you pick, bro – start today!

You would then imagine other stanzas rhyming ‘today’and hurray,’ and the seal slapping around the playing field balancing your child’s future on his nose. Clowns,mascots – a cannon could be involved.

Looked at purely from a tax perspective, advises my friend and college savings guru, the estimable Less Antman, it’s hard to imagine any alternative being better than an UTMA account. Although taxes are due annually on taxable income on the child’s return, the first $750 isn’t taxed and the next $750 is at the child’s rate, until the child is 14. From 14 on, the first $750 isn’t taxed and ALL the remaining income is taxed at the child’s rate. That rate is probably going to be 15%, but a 10% rate will apply to long-term capital gains- 8% for stocks or mutual funds held over 5 years before sale.

So, an UTMA is good, but as you say, the child takes control at 18 (or 21, depending on the state), and you never know what damn fool thing he or she might do with it. (Another potential problem: if you die before your kid turns 18 or 21,the account is included in your estate and subject to tax along with the rest of your millions.)

The tax advantage of a QSTP (also known as a 529 plan) is that tax is deferred until withdrawal, and then taxed at the child’s rate. The disadvantage is that it is all ordinary income. And you miss that$750 per year taxed at the zero rate. Also, of course, the QSTP is likely to include administrative fees that your UTMA need not.

There’s been some discussion in Congress about making 529 withdrawals exempt from tax. If that ever happened, you might wish you’d chosen gone with the 529 plan.

But with a QSTP you retain control of the account indefinitely, the assets are not included in your estate should you die, and the assets can be rolled by the owner to another relative with very few restrictions as long as the state plan permits it (when saving for multiple children, excess funds in one UTMA cannot be transferred to another child). Also, 5-year averaging can be used for 529 plans for gift tax purposes, so that the $10,000 annual gift limit can be used to place $50,000 into a 529 plan immediately.

If you’re pretty certain you’ll be able to trust your child with substantial funds at age 18 (or 21), and that he or she will be willing to help a sibling if he or she has more money in the UTMA than needed for his or her own college expenses, then the UTMA is the way to go.

But how can you know if your preschooler is going to be able to handle such wealth at that time? Says Less: ‘I’ve had too many clients with large UTMAs start to panic as their child approached that point to feel comfortable advising it. With a 529 plan, you KNOW your savings will go for education, and with multiple children, you KNOW you’ll be able to move the money around if one child doesn’t need all of it. Even so, I think it is still a good idea to open an UTMA for a child and fund it MODESTLY each year, giving them some spending money for college and a valuable lesson in compounding. Setting up an automatic transfer of $25 per month (or even per quarter)into a TIAA-CREF mutual fund for a child and saving the statements so they can be shown the progress over the years is an object lesson well worth the pennies per day it will cost.’

Note: The answer to your question is: NO. Money already in an UTMA cannot be transferred into a 529 plan. (There is a small exception to this, Less says, but with little practical effect.) It must be funded with new money. Sell the seal; melt down the cannon.

Note: For more on various state college savings plans, see savingforcollege.com.

 

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