The Motley Fool Discussion Boards

Previous Page

Financial Planning / Tax Strategies


Subject:  Re: Kids, UTMA accounts, feuding parents Date:  1/10/2013  11:47 AM
Author:  MakingTrax Number:  117338 of 123036

The first part of the OP's post alludes to the question of how UTMA funds can be used. As others have already pointed out, this is a legal question and not a tax issue (although it could be). Based on my own experience and understanding with UTMA accounts, the funds belong to the minor once they are designated as UTMA. UTMA (or UGMA) accounts allow that earnings be taxed at the kiddie rate. If a parent/custodian has unrestricted access to those funds (as to pay for a their own financial obligations), the IRS could determine that the funds never really belonged to the minor and should have been taxed at the parent's rate all along (i.e., holding the funds under UTMA was under false pretenses to avoid paying tax on the earnings). However, in the situation presented by the OP...from a legal standpoint...I do not know if money paid from the kids' accounts for their own benefit would trigger that concern.

IM(non-legal)O, if the Ex pulls the funds and claims them as credit for child support (her obligation), that would cross the line. However, if the Ex uses the funds directly to pay for clothes, educational expenses, special camps, etc., that could fall within the definition of benefit for the boys, but she would still owe her outstanding child support. Regardless, in the grand scheme of things...there is the question of "who would ever know"? Unless DF or the boys made a point to sue the mom/Ex for theft or report her to the IRS...well...this kind of stuff happens.

The OP specifically asks: Is there any way on earth that DF could end up responsible for paying taxes and/or penalty on the UTMA for the boy he has been claiming as a dependent? DF is NOT the custodian on either account, but will that make a difference to the IRS? What if Ex has a payout check made out to DF?

Based on the log