From: dodson@convex.COM (Dave Dodson)
Newsgroups: misc.taxes
Subject: Re: Uniform Gift To Minor Act
Keywords: transfer, taxable income
Date: 6 Nov 92 21:38:57 GMT
Article-I.D.: news.1992Nov6.213857.12246
Reply-To: dodson@convex.COM (Dave Dodson)
Distribution: usa
Organization: Engineering, CONVEX Computer Corp., Richardson, Tx., USA
Originator: dodson@bach.convex.com
X-Disclaimer: This message was written by a user at CONVEX Computer
              Corp. The opinions expressed are those of the user and
              not necessarily those of CONVEX.

In article <Bx78zq.7qx@gdls.CSCTMD.COM> mccabe@gdls.CSCTMD.COM (Harold McCabe) writes:
>In prior years, I put money in an account for one of my children
>via the Uniform Gift To Minor Act (UGMA).  Now, I would like to
>take some of it out of the account (money market fund) and purchase
>common stock for the same child.  If I do this, will a 1099 be sent
>to the IRS?  Since the stock will be purchased on behalf of the 
>child (UGMA), will I be taxed on the money withdrawn?  What if I
>wanted to spend the money on, e.g., braces for the child.  Would I
>be taxed on that?

Yes, a 1099 will be filed.  It will reflect the amount of interest earned
on the account, and the interest is taxable depending on the amount of
interest and the child's age.  Roughly, if the child is under the age of
14, the first $500 is tax free, the next $500 is taxed at the child's rate,
and the remainder is taxed at your rate.  If the child is 14 or over, the
first $500 is tax free and the remainder is taxed at the child's rate.
You may have to file an income tax return for your child.  The $500 limits
are indexed to inflation and increase slightly each year.  Assuming that
you are in the 28% bracket, you would save $140 per year on the first $500
and $65 per year on the next $500, for a total maximum savings of $205 on
your federal income tax.

You will not be taxed on the money withdrawn, because you will have paid
the tax along the way, on interest or dividends as they are paid or on
capital gains as they are realized.

Now some advice about using UGMAs:

What you lose by investing in your child's name is control of the money.
Once you transfer the money to your child, it is the child's and you cannot
take it back.  As custodian, you will have a fiduciary responsibility to
manage the investment for the maximum benefit of your child, not for your
maximum benefit.  Once your child reaches the age of 18, he/she can take
control of the funds without your permission and can spend it on anything
he/she likes.  So, for example, after you have been saving for years to put
your kid through college, if your kid decides not to go to college but to
adopt a lifestyle you don't approve of, you could find yourself supporting
the kid through the money you have saved.  Or the kid could take the money
and buy that shiny red sports car you would have loved to have had but
gave up for his/her benefit.  Either of these scenarios might leave you
feeling taken advantage of by your child.

Another cost of investing in the child's name is that it becomes harder to
qualify for financial aid.  A college will expect your child to spend 35% of
his/her financial resources on education each year, but if the same funds
are in your name, they will expect you to spend only 5-6%.

I recommend that you do not save or invest for college in your kid's name.
The at most $205 per year it will cost you is a small price to pay for
maintaining control of your money.

If you insist on saving/investing in the kid's name, do so only to the
limit of the tax advantage.  Currently an investment of about $10K might
max out the tax savings.  Plan to spend this money first.

----------------------------------------------------------------------

Dave Dodson		                             dodson@convex.COM
Convex Computer Corporation      Richardson, Texas      (214) 497-4234
Newsgroups: misc.taxes