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Author: momofteens Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 6730  
Subject: transfer ownership at 18 of mutual funds Date: 1/19/2000 10:06 PM
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My son will be starting college in August 2000. He has 2 custodial mutual fund accounts. The larger one is worth approximately $44,000. with his grandfather as the custodian. The other, worth about $2,800,has myself(his mother) as the custodian. He is turning 18 on April 7th,2000 and at the time will be able to assume ownership of those accounts. I was told by a college financial planner that funds in his name would be assessed at a rate of 35% towards getting financial aid, and funds in our name would be assessed at 5.9% after a 28,700 asset protection. Obviously, it is better for the funds to be in our name. I was told that once he has ownership, he can gift the ownership. The larger one he was planning on taking out 20,000 to cover the first year tuition, and transferring ownership of the balance to us; and then each year we would take out from there for his tuition. We were told by our accountant that's the only way to avoid the sale of the stocks. I'm in the process of filling out the FAFSA form (the one the government requires to apply for financial aid) I'd like to know if this is a good plan financially, as far as capital gains when the money is taken out before he transfers it, and if we take some out. Thanks for any advice!
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Author: Tooner Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2397 of 6730
Subject: Re: transfer ownership at 18 of mutual funds Date: 1/20/2000 8:23 AM
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<<<
Obviously, it is better for the funds to be in our name. I was told that once he has ownership, he can gift the ownership. The larger one he was planning on taking out 20,000 to cover the first year tuition, and transferring ownership of the balance to us; and then each year we would take out from there for his tuition. We were told by our accountant that's the only way to avoid the sale of the stocks.
>>>

Well... I probably shouldn't say anything because I don't have any real answers... but you probably won't get too many replies from this board.

This is what comes to mind for me:

Your son can gift the funds to his parents (you) but only $10,000 per parent. Anything you receive over $10,000 is taxable.

When your son gives up the $10,000, I think he is liable for taxes on his end. Just because he doesn't sell them doesn't mean he's able to avoid taxes.

I could be wrong, but the bottom line is y'all need to figure out all these transfers and keep taxes to a minimum.

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Author: nacohn One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2398 of 6730
Subject: Re: transfer ownership at 18 of mutual funds Date: 1/20/2000 8:45 AM
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Your son can gift the funds to his parents (you) but only $10,000 per parent. Anything you receive over 10,000 is taxable.
When your son gives up the $10,000, I think he is liable for taxes on his end. Just because he doesn't sell them doesn't mean he's able to avoid taxes.


As long as he gifts the FUND SHARES to you, and not the proceeds, he should not be taxed on the share gift, because he did not realize the gains. Of course, you do have to watch out for the 10,000 limit. One thing you could do, is do the gift to each parent, both this year and beginning of next year. Then, reapply for financial aid next year (I am pretty sure you can do that).

Another thing to consider... You know those shares are going to be sold soon, regardless of which of you sells them. You may wish to consider having him sell them, because of the presumably lower tax rate, then gifting the CASH to the parents. The advantage of this, is that the assets will still be transferred out of his name for financial aid consideration, but the tax that needs to be paid on thim will probably be lower than if you sold them. To see if this makes sense, you should calculate his marginal tax bracket, if it is less than 20% (the max rate for long term cap gains), then it may be worth a closer look. In that case, he would be liable for the taxes on the sale (but of course you could pay the taxes for him out of the proceeds if he had already gifted the proceeds to you before tax time).

** One thing I am not sure about - at what point in time are his assets analyzed for financial aid? You should verify whether they look at his asset history or just the current value of assets at time of application.

The larger one he was planning on taking out 20,000 to cover the first year tuition, and transferring ownership of the balance to us; and then each year we would take out from there for his tuition. We were told by our accountant that's the only way to avoid the sale of the stocks.
Hmm, short time horizon ... planned selling of stocks in the future. Why would you want to avoid selling the stocks? sounds like you should find a good time to cash out and get a CD (minimal risk for known planned short term expenses). Sounds like another reason for having him sell the stocks and transfer it to you as cash (if his taxes would be lower)...

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2399 of 6730
Subject: Re: transfer ownership at 18 of mutual funds Date: 1/20/2000 11:56 AM
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<<<<I was told that once he has ownership, he can gift the ownership. The larger one he was planning on taking out 20,000 to cover the first year tuition, and transferring ownership of the balance to us; and then each year we would take out from there for his tuition. We were told by our accountant that's the only way to avoid the sale of the stocks. I'm in the process of filling out the FAFSA form (the one the government requires to apply for financial aid) I'd like to know if this is a good plan financially, as far as capital gains when the money is taken out before he transfers it, and if we take some out.>>>>

I dislike being the bearer of potentially bad news, but IMO this series of transactions borders on fraud. "Junior" is not really making a gift. Why should "junior" not pay for his own education?

In addition, any aid officer worth his or her salt will ask "junior" what happened to these other dollars that were in your account; if the truth be told, I suspect that the aid officer will still count them as "junior's" funds; if the truth not be told then y'all are only digging your own hole deeper, IMO.

To be forewarned is to be prepared.

Just my $0.02. Regards, JAFO

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