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 logic outlined above, probably not. But here are two other tax issues to consider: kiddie tax and child income.With only $2K each in UTMA accounts, it is not likely that DF has to be concerned with "kiddie tax" reporting for either child. As long as the collective income from all accounts owned by each child does not exceed $1900 (or something like that amount....please check current IRS limits), then DF should have no worries.Since the OP mentioned that the 2 boys are already talking of car purchases, it would be fair to ask about the age of the boys and whether or not they have earned income from jobs. If the boys have jobs/wages, then either boy might be required to file a tax return; in that case, earnings from the UTMA accounts would be declared on each boy's respective returns.Although not part of the OP's question, I offer this unsolicited Dr. Phil advice. I'm not sure what "DF" stands for in this post (e.g., dear fiance, dear friend, dear father (of the boys), dear Fred, or what), but the OP may suggest that DF approach this a little differently and encourage DF to have an objective dialogue with his Ex about those funds and the how they relate to future goals for the boys. For example, the OP notes that the boys "think" the $$ is theirs to spend on cars. Was this the intent from the beginning? Have the parents agreed on the age that either child would be allowed to own a car, and who would be responsible for insurance, maintenance, etc.? Does advertising to the boys that this $$ is theirs to buy a car set up false expectations for each boy that they get to buy a car at 16 or 18? (Note that this in turn could cause further strife if one parent is encouraging a car purchase while the other is opposed.) Would it be better if both parents came to agreement over what terms the boys could use these funds? Perhaps the funds should be saved for college expenses, or not tapped at all until after college? (Note that some UTMA trustees allow you to establish age 25 as the age for release of custodian oversight.) If both parents are on the same page about how those funds might be best preserved for benefit of the boys (and the boys are told the rules), that would likely dispel concern for misuse of the funds (by either the Ex or the boys). Further, this dialogue could remove one less obstacle toward establishing a succesful joint parenting relationship (putting the focus on the boys, rather than the parents). This dialogue would also allow DF to establish clarification for future tax reporting.Ideally, it would benefit the boys if the UTMA funds are used to fund Roth IRA accounts for each once they have jobs. (Further, the boys could be encouraged to add some of their own job earnings to the Roth too AND establish their own checking/savings accounts separate from mom to save for a car). Such a dialogue would provide an opportunity to teach the boys about finacially responsible behavior, which is not something that is likely to be observed directly from the irresponsible behaviors modeled by the Ex and DF at this point.Hope this helps.Making Trax
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