"David Woods, EA, ChFC, CLU" <dwoods[at]woods-financial.com> wrote:

- quote -

I'm not ignoring the penalty. In most cases the benefit in the
529 plan of the deferral of the taxes that would have other-
wise been had the funds been held in outside investments will
more than offset the potential penalty on the income earned and
not spent for college. The only place I can the penalty being
a problem is if the funds are in the plan for only a year or two,
it earns a lot of income in the short time, the child doesn't go to
college, and he/she cashes it in within a couple of years. In that
scenario the penalty may be greater than the benefit of the tax
deferral.

Back to my earlier premise then - if it was reasonable to assume
that the child should go to college, but ulitmately doesn't, I
don't see a liability. The fact that an investment works out to be
not as good as some other investment that he could have made
instead doesn't mean the trustee has liability. That happens
every time he decides to, say, buy General Motors stock vs.
Exxon stock. On the other hand, if there was pretty clear that
the child was not college bound, and if it turns out that the
penalty is greater than the benefit of the tax deferral, then I
think the answer is different.

Brian Bivona, CPA

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<ezeppelin[at]msn.com> wrote:

- quote -


I responded to your post, but don't see my response so I'll make an
additional comment or two now.

First, what you haven't posted here, and what I recommend you NOT post, is
the trust document that is supposed to be guiding the trustee. I've worked
on my share of trust returns and seem more than a few trust documents and I
have NEVER seen one that allowed the trustee to distribute the income to
whomever they pleased. Every trust document I've ever seen has required the
distribution to be to or for the benefit of the beneficiary.

Second, there is a difference between a trust distribution and the trust's
distributable net income. These two numbers do NOT have to match and in
fact are often different. Just because the trust makes a distribution does
NOT make that distribution taxable. Likewise, just because a trust
beneficiary has to pay tax on distributable net income does NOT mean that
any money was distributed.

Lastly, you've posted a legitimate question, likely because you do not have
the expertise to deal with it yourself; and now when those of us who are
trying to help you respond with questions so that we can make sure we
understand your situation sufficiently to actually try to help you - FOR
FREE - then you go and get an attitude. Quite frankly, if you don't like
the free advice we're trying to give you then by all means open the phone
book and your wallet and pay for help.

Gene E. Utterback, EA

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zeppelin[at]msn.com
(ezeppelin[at]msn.com) wrote:

- quote -

for the benefit of the daughter, but the father can give the money to
whomever he pleases. Is that language in the trust?

-HW "Skip" Weldon
Columbia, SC

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"ezeppelin[at]msn.com" <ezeppelin[at]msn.com> wrote:
- quote -

For one thing, the distribution isn't in and of itself isn't
taxable. That alone warrants an apology for the snide
remark. For another, how do you know it isn't a
distribution of corpus?

- quote -

I'm sorry, are you the trustee of the trust or someone trying to defend a
position you've provided no facts for? The trust distribution cannot be to
whomever you please unless the trust document allows it to be to whomever
you please. If the distribution is specified to be to your daughter, then
it goes to her. Under HER name. With any taxable component taxed to HER.

Finally, YOU never stated what the trust indicated about who the money was
supposed to go, under what circumstances or in what amounts. So forgive me
if your fact pattern is now more than a little muddled.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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Richard J Kinch wrote:
- quote -

You don't pay income tax nor penalty on a return of your own
investment in the QTP. The formula for computing the
penalty only uses the taxable amount of the distribution. It
works just like IRAs and pensions. If there is no taxable
distribution, then 10% times zero equals zero.

--
Alan
http://taxtopics.net

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ezeppelin[at]msn.com wrote:
- quote -

Not all trust distributions carry out income. Income is
determined without regard to the amount of cash actually
distributed. Income for tax purposes may be calculated
differently than income for distribution purposes. (In your
case, the required distribution may be entirely income. But
the fact that it's a trust distribution doesn't mean it's
taxable.)

- quote -

If that's true, no one can give you good advice without
seeing the entirety of the trust document. (In fact, even
if that's not true, you really need advice from someone
who's seen the entirety of the trust document.) If you can
make trust distributions or not, to anyone you please, at
your sole discretion, that sure sounds like the
distributions are all taxable to you, regardless of their
final destination.

- quote -

How did the UTMA get in the middle, then?

Phoebe

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- quote -

In New York I was cautioned that the child could contend
that it was an inappropriate transaction and sue for damages
if they didn't want to use it for education.

I didn't see that as a problem and set them up. I will find
out in a few years if I was prudent.

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"David Woods, EA, ChFC, CLU" <dwoods[at]woods-financial.com> wrote:

- quote -

Uh, hello? Because it's a trust distribution, reported as
taxable income on form K1, and because I live in the United
States, where income is taxable.

- quote -

The trust distribution is to whomever I please. Myself, my
daughter, the President of Kryzygstan. Just trying to
minimize tax consequences. Rather than distributing the
dollars to myself, paying tax at my high marginal bracket,
and subsequently putting my own money into a 529 or ESA,
I'm trying to save money by distributing the money directly
from the trust to the 529 or ESA, thus bypassing me and my
high bracket. I don't see what's so hard to understand
about that.

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A. G. Kalman writes:

- quote -

Wait. You mean the untaxed income held in the plan. The
principal can be withdrawn without penalty, right?

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- quote -

Perhaps in a parental aspect. Not in a fiduciary one.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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"Brian" <bpbiv[at]yahoo.com> wrote:
- quote -

You're also ignoring the penalty on earnings in the even the
child does not attend college.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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"David Woods, EA, ChFC, CLU" <dwoods[at]woods-financial.com> wrote:

- quote -

Uh, hello? Because it's a trust distribution, reported as
taxable income on form K1, and because I live in the United
States, where income is taxable.

- quote -

The trust distribution is to whomever I please. Myself, my
daughter, the President of Kryzygstan. Just trying to
minimize tax consequences. Rather than distributing the
dollars to myself, paying tax at my high marginal bracket,
and subsequently putting my own money into a 529 or ESA,
I'm trying to save money by distributing the money directly
from the trust to the 529 or ESA, thus bypassing me and my
high bracket. I don't see what's so hard to understand
about that.

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- quote -

No. Giving a child an incentive to go to college is a
reasonable and proper thing for a guardian/trustee to do.

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"David Woods, EA, ChFC, CLU" <dwoods[at]woods-financial.com> "Brian" <bpbiv[at]yahoo.com> wrote:

- quote -

David Woods wrote:

- quote -

Not really. The only potential tax would be on the earnings
of the account since it was converted from UGMA to 529.
This is income that would have been taxed along the way had
it not been converted. Certainly there are differences in
the ultimate tax liability - it's taxed when withdrawn from
529 if not spent on college vs. as earned, it's ordinary
instead of capital gain and dividend income, it's possibly
taxed in one year instead of several. But there is no extra
taxable income that wouldn't have been reportable by the
child had it stayed in an UGMA; it's merely changing the
year of taxability. The trustee of an UTMA account faces
the differening tax consequences for differing investments
any time funds are invested in anything.

My own personal opinion would be that there shouldn't be a
problem unless at the time the funds were converted it was
unreasonable to assume that the child would go to college.

Brian Bivona

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- quote -

What makes you think that? What makes you think it is
taxable at all?

- quote -

Look, if the trust distribution is to be for the benefit of
your daughter per terms of the trust, then its her money.
Moreover, if you're responsible for HER money, I would
suggest that you have a fiduciary duty to manage the money
prudently. You do NOT have a duty to tell her that her
money must be educationally oriented.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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"Brian" <bpbiv[at]yahoo.com> wrote:

- quote -

Do you see an inherent problem with essentially forcing a
child to go to college or face an income tax consequence on
the child's own money?

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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- quote -

Neither, as of yet. The money is currently in a trust fund
established by her deceased great grandmother. A
distribution from the trust needs to be made before the end
of 2004. I am trying to figure out the best way to do this.

I would have preferred that the trust write a check directly
to a 529 account or an MSA for her benefit, thereby avoiding
the complications of a UTMA. However, I think that in that
case, the trust distribution would be taxable income to
whoever controls the tax-advantaged education account (i.e.,
me.)

My marginal tax bracket is about 42% once you add in state
income taxes, while hers is roughly 0% on the first $1500
and then proceeds up through the 10%, 15%, and other lower
brackets. (She is age 3, has zero other income, and lives
in a state with no income tax.)

Therefore, my obvious preference would be for the
distribution to be made to her rather than to me. I guess
what I need to decide is whether this tax advantage is worth
the additional onerous burdens of UTMA restrictions.

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er, make that "ESA for her benefit," not "MSA". Oops.

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<ezeppelin[at]msn.com> wrote:

- quote -

You can move UGMA/UTMA money to a 529 Plan BUT this specific
529 will now belong exclusively to your daughter, not to
you. You have to keep the character of the money intact.
Your 529 advisor can best guide you on how to title the 529
account.

Gene E. Utterback, EA

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ezeppelin[at]msn.com wrote:

- quote -

This question has been asked several times. The consenus
answer is state law governs with regard to a UTMA/UGMA. My
personal view is it will not comply with most states' law
(or should not comply) unless the UTMA account is the
custodian of the 529 plan. I'm not sure whether the
custodian of a 529 plan can be anything other than an
individual.

Regards,
Bill
~~~~
Associate Professor of Accounting
Longwood University
Department of Accounting, Economics & Finance
http://www.longwood.edu/staff/brownwp/
Opinions expressed by me are mine, not necessarily my employer's

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