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That sounds incorrect to me.

Posters at Fairmark seem to disagree with you, too.

"A UTMA remains a UTMA for its duration. The fact that a UTMA may be invested in a CESA or a 529 does NOT shed any restriction or duties under the UTMA and in fact the UTMA designation is supposed to run withthe new wrapper as well--this is understood in 529 circles."

http://fairmark.com/forum/read.php?1,12635

And Kaye Thomas does not agree:

http://www.fairmark.com/custacct/529plans.htm

"Is a Transfer Permitted?

There's no definitive ruling on whether you're allowed to transfer assets from a custodial account to a section 529 account. In fact, there's no central authority that could issue such a ruling. Section 529 plans must operate within certain parameters set forth in the tax law, but most of their rules are established by the individual states. Likewise, custodial accounts are creatures of state law. The IRS may tell you the tax consequences of using them in different ways, but they have no authority to tell you what you may or may not do with these accounts. The following comments are based on analysis of the rules for custodial accounts as set forth in the Uniform Act together with general observations about the way section 529 plans work. The rules for both the Uniform Act and section 529 plans may differ in your state, although differences for this purpose are usually a matter of detail.

Acceptance by the section 529 plan

The first thing you need to know is whether the section 529 plan you want to use will accept the transfer and under what terms. I understand that some section 529 plans have not yet decided that they can accept these transfers, or have decided that they cannot. Others accept transfers but impose restrictions on them. One restriction I have heard mentioned is that you aren't permitted to change the beneficiary, as is normally permitted in a section 529 plan. As explained below, changing the beneficiary would violate the Uniform Act, so this isn't a restriction that will cramp your style unless you were planning to do something improper. If your plan won't accept the transfer or imposes conditions you find unacceptable, you either have to deal with a different plan or abandon the idea.

Uniform Act provisions

Having found a section 529 plan that will accept the transfer, you still have to consider how the Uniform Transfers to Minors Act applies. Under the Uniform Act, the custodian's responsibility to preserve the assets for the benefit of the child doesn't terminate when cash or assets are withdrawn from a custodial account. If custodial assets are invested in a 529 account, those assets continue to be assets owned by the child and subject to the protections afforded by the Uniform Act. If permitted by the 529 plan, the account should be be designated as a custodial account, with the owner being shown as "[parent's name], as custodian for [minor's name]." Even if the 529 plan doesn't accept such a designation on the account, the Uniform Act continues to apply. The custodianship doesn't terminate until the money is transferred to the child or expended for the child's benefit."

Regards, JAFO
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