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Hi Guys... This is my first post here, but it seemed like the most appropriate board to use. I apologize if this has been answered before, but I couldn't find an answer when I did a search.

DH and I are DINKs and overweighted in DELL stock. His brother's daughter will turn 1 in January, and we'd like to open a college fund for her. We just want to put in a small amount, but we figure she definitely has time on her side! We'd like to use some of our DELL stock to fund this account. When I asked my financial advisor friend, he said that this couldn't be done. He suggested we sell the stock and open a 529 account with the funds. I'm thinking that he was just interested in selling us a mutual fund though.

Is it really impossible to gift stock to start a college fund?

THANKS!

:-) Juice
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>>>Is it really impossible to gift stock to start a college fund?<<<

I'm not real qualified or sure but I believe you can't transfer stock directly into an IRA, only cash. The Knowledgeable Ones on the Tax Strategies Board could give a more definitive answer.

Doug
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Is it really impossible to gift stock to start a college fund?

It depends on what you mean by "college fund." You could open a UGMA account for her with you or her parents as custodians and transfer the Dell stock to that account. The cost basis when she or the custodian sells it will be your cost basis. It will be a taxable account but when the stock is sold, it will be the child's tax rate (unless it's before she turns 14 when there is a currently limit on the capital gians taxed at her rate and the rest taxed at her parents rate.)

This money is officially hers once it's gifted and she will have access to it when she turns the age of majority( which is 18 or 21 depending on the state). http://www.fairmark.com/custacct/index.htm has a description of the pros and cons of these types of accounts. One of the cons often pointed to is that the child will spend the money on something other than college. To me,that assumes that no one will teach the child what the money is for or set the expectations for it. I used UGMAs(because it was all that was available for at least one of my children) and never had a problem with this issue.

My opinion is that people get too tied up in 529s and Coverdells when there are also other options out there. I also believe that 529s were designed as an estate planning tool and are being bought by the wrong customers. There needs to be serious considerations of the tax issues(both credits and deductions) that come into play when the 529 will be used. There's also still clarification necessary in terms of its impact on financial aid.

rad
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The nice thing about UGMAs is that they *don't* have to be used for college. This is from someone who had money left in a couple of her UGMAs after college--I got loans, grants, and scholarships, worked in the summer, had work study during the year, etc. It was sure nice to have a little left in a couple of those accounts afterwards. One helped out a little for our wedding. And one is still waiting for something special. Neither account had a lot left, but I didn't have to use it for college, which was nice.

Selphiras
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Just a thought, but if you actually work for DELL and bought the stock as an ISO or NQSO or even through a stock purchase plan then gifting has it's own set of tax rules and may not be the best thing for your to do. I'd ask your financial advisor why he believes gifting isn't advisable...he does work for you and you should know the details.

cautiousone
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Just a thought, but if you actually work for DELL and bought the stock as an ISO or NQSO or even through a stock purchase plan then gifting has it's own set of tax rules and may not be the best thing for your to do.

Yeah... it is ESPP stock. We've had it for over 18 months though, so it's my understanding that we would just be taxed on the difference between the fair market value on the date of purchase and the purchase price. The stock has appreciated since the purchase, so by gifting the stock, we would be able to contribute a lot more than if we just put in cash.

I was just hoping there was a way to do this to help save for her college expenses.

I'd ask your financial advisor why he believes gifting isn't advisable...he does work for you and you should know the details.

He said an UTGMA would count against her if she applies for financial aid. The problem with the 529 plan is that we don't have the cash to fund it. If we sold the stock and then used the money to fund her account, we'd get hit with a pretty big tax bill because of the appreciation.
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Your advisor is correct. A custodial account will count against the child, but at a rate of ~35%. Who knows how 529 accounts will be treated in the future as they are gaining ground in the total asset mix. I would not count on anything as a For Sure item at this time.

If you really want to give the stock to her, do it as a custodial account. So what if it counts against her in the financial aid mix? There are very little amounts of "free" money available, and most kids are funding their educations using student loans. If your gift today lowers the amount of student loans she will have when she graduates, then that is all the better for her and you gave a wonderful gift.

Jenn
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Check out this web site for information on equity compensation rules as it pertains to taxation. I have purchased 2 of the books and found them easy to read and very up-to-date.

http://www.fairmark.com

We gifted some of our ISO's a few years back...big mistake. We got nailed with even more AMT tax and were not able to take the credit later as they were no longer our shares. Best advise...be sure that you aren't in an AMT situation BEFORE you do the gift.

Here's a couple other points:
1. Are you gifting more that $10,000?
2. She obviously will be in a looooooow tax bracket so I wouldn't worry about not using a qualified plan unless it would hurt her financial aid.
3. Have you thought of letting it continue to appreciate as your's and then giving it to her in $10,000 chunks after she graduates (and before her loans come due) - you could deliver it earlier if it doesn't screw up her aid package. I have my kids college fund in a separate, but standard account and plan to start gifting $10,000 to each child once they start college. If they have to get some loans that's ok with me - I think, based on my own experience, that it's good to know how loans impact your life after college. And, I can always help them pay the loans off if that's what we, together, decide to do.


Just food for thought...

cautiousone

PS. I was maid of honor at my best friends wedding 3 years after college. Her Dad announced that he would pay off the balance of her loans so she could have a fresh start with her new life...let me just say that JOY just wasn't an adequate word to describe the feeling she had that day!
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Check out this web site for information on equity compensation rules as it pertains to taxation. I have purchased 2 of the books and found them easy to read and very up-to-date.

http://www.fairmark.com



Thanks for the link! I actually am really familiar with the tax laws associated with the ESPP because I used to be a stock plan administrator (we don't have any ISO's through DELL, so no evil AMT worries there), but the site had really good information on UTMA's. (I don't know why I wrote UTGMA before... I guess I was trying to combine the two, LOL!)

We could definitely wait, and then gift her the money once she actually reaches college. That might be what we end up doing... I just wanted to know if I could use this as a 1st birthday present for her. We're talking about a small amount, maybe 20 shares (~$700). A UTMA might be the best option because it's a small amount so it shouldn't affect her financial aid too much, and she won't have a tax liability until the shares are sold, right?

What kind of fees are usually associated with opening a UTMA account? Will the fees eat up most of my contribution?

Thanks for everyone's help!

:-) Juice
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cautiousone100 writes (in part):

Have you thought of letting it continue to appreciate as your's and then giving it to her in $10,000 chunks after she graduates (and before her loans come due) - you could deliver it earlier if it doesn't screw up her aid package. I have my kids college fund in a separate, but standard account and plan to start gifting $10,000 to each child once they start college.

I reply:

It looks like you're trying to structure this to avoid triggering the unified gift/estate tax. If that's the case, there are a couple of details you should know. First, the per person, per year limit is now up to $11,000. Second, my understanding is that any money that you pay directly to the college does not count against that limit. In other words, you're much better off (from this perspective) paying the $10,000 directly to the school, because that way you retain the option of giving your kids additional money without having to worry about gift tax issues. --Bob
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Bob7...
Thanks for the update on the dollar amount. Yes, I understood that payments to the college directly would not count, but as I understand it, monies paid for non-tuition (room and board, etc.) would better handled with gift monies. And, here in California this is a huge amount.

cautiousone

PS - Here's a good Fool article on income shifting in case you missed it - http://www.fool.com/taxes/2003/taxes030905.htm
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...DH and I are DINKs and overweighted in DELL stock. His brother's daughter will turn 1 in January, and we'd like to open a college fund for her. We just want to put in a small amount, but we figure she definitely has time on her side! We'd like to use some of our DELL stock to fund this account. When I asked my financial advisor friend, he said that this couldn't be done. He suggested we sell the stock and open a 529 account with the funds. I'm thinking that he was just interested in selling us a mutual fund though.

Is it really impossible to gift stock to start a college fund?


I see this has been covered pretty thoroughly, but let me add what I learned from asking a broker about it. None of the securities involved in my hypothetical question had been granted through stock options or other incentive plans, and I do not have any clue if that would make a difference regarding the reply. I suspect that it would not. Anyway...

My question to the broker had been about mutual fund shares and the reply was that a transfer from a *taxable* brokerage account, to a *taxable* custodial account for the child, would be entirely possible.

What was notable about the reply was that the transfer would not be considered a "redemption" of the shares in question, and therefore would not trigger an early redemption fee against the source (donor) account, if (for example) the shares had been held only a short time before the transfer.

Furthermore, if it were a fund that charged transaction fees at that particular brokerage, there would be no such fee for a transfer from parent to child. Obviously, once the shares were in the custodial account, they would have to be held for the required time or the early redemption fee would kick in; and any subsequent purchase or sales would incur transaction fees. But the transfer itself was totally fee-free.

What I found notable, and perhaps pertinent to your situation, was that so many "rules" were easily bent, or just not applied, in transferring to a child's account. Again, this would *not* be the case if one were trying to move stock to, or from, a tax-deferred account on either end (e.g. from an IRA, or into a Coverdell AKA "education IRA"). In that case, yes you'd have to liquidate into cash before the gift.

But if the money were in the parents' IRA, it should just stay there -- because college funding is a legitimate reason for a penalty-free withdrawal from a parents' IRA anyway. No need to move it to the child.

The "friend" was not much of one, it seems to me, in advising you to liquidate the stock first (thus incurring potential tax liabilities) and then to put it into a 529, which has so many limitations. An immediate question would be which 529 plan was being suggested -- and why.

The only positive I see in all that is that most 529 plans are based on mutual funds rather than individual stocks, which means the investment risk is spread around a bit. You probably don't need this tip, but for the record, I don't think anybody's future should ride on a single stock. If Enron taught anything, that would be it. Still, I'm not a fan of 529 plans despite some of the seeming advantages they have.

*As current tax law stands*, I believe the 529 has more benefits for educational use than other types of accounts. But then again: "as current tax law stands" the USA is gathering deficits and heading toward bankruptcy! So I would expect to see changes in the tax code in the next 10-20 years, during which these kids are hitting college age.

College financial aid offices often use formulas of various kinds to calculate the student's "need" when applying for scholarships or other support; and the 529 money is usually not considered to be owned directly by the student, and therefore does not count as much in reducing his/her "need." But again, that could change.

As others have noted, one should probably think about the child being able to get support based on performance of some kind or other, and using the invested money to do what it's meant for -- i.e. pay for college. It becomes a bit cynical to try to game the financial aid system, as people seem wont to do. Like, let's invest a ton of money for little Freddie and Susie, but we'll "hide" it in a 529 plan, so to speak.

In the meantime, it is noteworthy that many colleges are placing less emphasis on financial need than they used to. (Well, they were moving that way before the market nose-dived in 2000. Don't know if it's still true...) In any case I would only look at a 529 plan as a way of building up a nest egg, not a way of getting over on the system.

Also, I always think of Coverdells or UTMA/UGMA accounts as more of a commitment to the child because the gift is irrevocable, unlike 529s. As others have explained it here, the initial investment can be withdrawn without penalty by the donor, leaving only the earnings for the student. I may not be citing it correctly, but it was argued here rather extensively before, and that feature was put forth as a 529 "advantage."

In your case, the only way the transfer would work is if you set up a UTMA or UGMA. The custodial account would work just like any standard brokerage account -- including the purchase minimums for mutual funds, and so on. That's another reason to gift mutual fund shares from a parent account, because the child's account -- being a "current" shareholder -- can then buy in smaller incremental quantities, rather than the larger quantities required by the fund for initial purchases.

You should be noticing by now that, if you want the custodial account to have some flexibility for asset allocation, it will either need to be well-capitalized (i.e. have a lot of money in it!); or you will need to create the asset balance by the way you gift securities into it in the first place. Otherwise, a small custodial account won't have much room to maneuver if changing market circumstances warrant occasional changes in investment strategy -- which also seems likely over a 10-20 year span.

FINALLY, you asked about account fees. This probably varies from broker to broker. If you make a few transactions per year -- and they don't have to be very big -- that will likely get you past any fees at most brokers for any kind of cash account like a UTMA/UGMA. And at some brokers, it *may* be true that custodial accounts are free, anyway. I know that some, and perhaps most, brokers do not charge for Coverdell accounts. So, perhaps some brokers are also generous when it comes to custodial accounts, but you'd have to check around.

Lots of stuff here, sorry for the length but I hope it helps. :-)
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