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MONEY-SMART KIDS
Parents Can't Tap Child's Custodial Account
by Janet Bodnar

I have a follow-up question to your column on custodial accounts for kids. We have a teenager with a considerable amount of money in a UGMA account. In order not to hurt his chances for college financial aid, could we withdraw that money and deposit it into another investment in our names, as long as 100% of the money will still be used for college? We are thinking about a state 529 college-savings plan.

Sorry, but that won't work. The money belongs to your son, and you can't legally transfer it to an account in your name, regardless of whether you use the money for college.

The same rule applies to state 529 plans. You could use your son's money to open a 529 account in order to take advantage of tax-free withdrawals when the funds are used to pay for college. But the majority of 529 plans have special procedures for such accounts. They are designated as "custodial 529s," and the custodian is instructed to inform the 529 administrator at the time the custodianship ends so the account can be put directly into the child's name.

"The general consensus is that a custodial 529 would still be considered the student's asset for purposes of federal financial aid," says Joseph Hurley of Savingforcollege.com.

Your question prompted a follow-up query of my own -- whether kids who are beneficiaries of regular 529 plans (not custodial 529s) have any rights to the money if it isn't used for college. The answer, says Hurley, is no. Only the account owner has ownership rights. If the funds aren't used for the beneficiary's college expenses, the owner can switch beneficiaries, withdraw the money and pay a tax penalty, or just let it sit for a while.

In your case, the best alternative would be to spend the money in the account for your son's benefit before it's time to apply for college aid.

Gifting custodial account assets

Years ago I purchased securities and put them in a custodial account for my son. Now he is 30 years old and doesn't want them. How can I get them transferred to my name? He is willing to do the transfer.

Easy. The securities now belong to your son, so all he has to do is make a gift of them to you. Under the law he can make you a gift of up to $11,000 a year without having to file a gift tax return.