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Author: brandybuck Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121177  
Subject: Use of funds in a UGMA Date: 12/19/1997 11:54 AM
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Can funds in a UGMA/UTMA be used (presumably for the child' benefit) without any signficant restriction? Are there any tax implications if used? Do any records need to be kept of the transactions or does one have to prove that the funds are used for the child's benefit?

Sorry if this question has been asked and answered...I'm new to the board.
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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 954 of 121177
Subject: Re: Use of funds in a UGMA Date: 12/19/1997 8:25 PM
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<<Can funds in a UGMA/UTMA be used (presumably for the child' benefit) without any signficant
restriction? Are there any tax implications if used? Do any records need to be kept of the
transactions or does one have to prove that the funds are used for the child's benefit?

Sorry if this question has been asked and answered...I'm new to the board.>>

This gets more into a legal issue than a tax issue.

It is my understanding that when you make a gift to a minor, you have really, legally, made a gift...and the funds now become the legal property of the minor. But since the minor is just that, a minor, somebody must act in the interest of the minor as a custodian.

And the custodian must act in the best interest of the minor, and act in the minor's benefit. If the custodian is actually taking funds from a UGMA account, they are actually STEALING from the minor, and can be subject to civil and criminal damages for such theft.

Who would know??

I have a true story for you...Grandma gave, over the years, more than $50k to granchild in a UGMA. Child is now 16, and really knew nothing about the UGMA account. Grandma and grandchild were talking one day, and Grandma asked where the kid would like to go to college. The kid answers "State U, but Mom and Dad tell me that they don't have enough money to afford to send me to State U".

Grandma goes ballistic, and begins proceedings to prosecute Mom and Dad. Kid jumps on the bandwagon and hires his own attorney (it is conservatively estimated that the UGMA account would have grown to over $120k by now...how hard do you think the kid had to look to find an attorney to take this on contingency).

As it stands right now, kid may end up owning parents house, and will evict 'em if he ever gets it.

So, before you start thinking about dipping into little Johnny's UGMA account, you might want to think again.

TMF Taxes
Roy

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Author: KATinChicagoland Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 955 of 121177
Subject: Re: Use of funds in a UGMA Date: 12/19/1997 9:10 PM
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<<Can funds in a UGMA/UTMA be used (presumably for the child' benefit) without any signficant restriction? Are there any tax implications if used? Do any records need to be kept of the transactions or does one have to prove that the funds are used for the child's benefit? >>

There is another issue besides the one ably discussed by Roy in his response. And it's a tax issue! The IRS takes the position that if the funds in a custodial account are used to meet a support obligation, the person with that support obligation is taxable on income in the account. In a sense what this is saying is that a proper use of custodial funds prior to the child actually receiving them is very narrow, because even if it is for the child's benefit, it must be for something the child's parents (or other persons with a support obligation) are not obliged to provide as part of their support obligation.

Custodial accounts are intended to be a simple way to transfer property to minors, but in reality they are tricky critters. For details, surf my web site, which is temporarily located at

homepage.interaccess.com/~kathomas

KAT in Chicagoland

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