TIFU By Building Custodial Accounts for Two Kids - For Education Savings

[bb5999]

Kids are 16 and 13. Both are great students that likely will be eligble for merit scholarships and discounted/even free tuition in our home state of Nevada. BUT - Over the years, my wife and I have been pretty good about stashing education savings money away for our two kids, but in custodial accounts.

Each kid also has an Edu Roth and we also have a small 529. Someone I trusted (a CPA friend) years ago, told me custodials allowed for more freedom in how money was spent. Now, after several lights have gone off for me, I realize that they will both be punished for having significant assets, when applying for any type of federal financial aid.

If I knew then, what I know now, my wife and I would have put more energy into funding our retirement accounts, and not setting aside so much college savings; especially in custodials that have grown significantly more than other savings vehicles.

Our goal has always been for the kids to pursue masters degrees, study beyond undergrad. My hope was always for them to spend light on undergrad and then have money to pay for masters at any school they want. Any input on how I might realign things, in hopes of getting the kids a discount from university (in US) MSRPs? I feel as if we're about to be punished, for doing the right thing (saving, saving, saving).

Can I do something like have the kids use custodial funds to buy real estate that does not bring in a lot of income? As they are kids, I don't know how they would qualify for a mortgage. Could they partner with me and invest in LLCs that have real estate assets?

Thanks for any ideas or direction.

[Gin1984]

That would throw up a lot of flags and the real estate would still be considered an asset.  A better idea is to use the custodial for non-needs for the kids.  Things like a computer, college application fees etc.  That said, depending on your income there may be no penalty for their money because your income may price them out.  My mother's income certainly did.

[Goldielocks]

The goal is for the kids personal accounts / funds to be low to warrant federal student loans, in order to be eligible here for a combination of scholarships and study/work arrangements at the university..  (which only students with federal loans qualify for).

To do this:
We (maybe) plan to charge the kids  (low) rent the first year they live at home, to bleed off their personal accounts, and allow them to apply for aid in years 3 or 4 with fewer personal assets. This is allowed by the student loan calculations which assume kids at home pay $500 per month for living costs and food...  I will also have quite a low income for 2 years by then, so the parental income will be low, too.

Also, as the other poster said -- buy all kid-related expenses (computer, clothing, food, vacation) with the custodial account during college years will draw it down quickly at the start, so they can qualify later.  If it is too big for this, then maybe applying for aid is not a real concern.  ?

[Gin1984]

The goal is for the kids personal accounts / funds to be low to warrant federal student loans, in order to be eligible here for a combination of scholarships and study/work arrangements at the university..  (which only students with federal loans qualify for).

To do this:
We (maybe) plan to charge the kids  (low) rent the first year they live at home, to bleed off their personal accounts, and allow them to apply for aid in years 3 or 4 with fewer personal assets. This is allowed by the student loan calculations which assume kids at home pay $500 per month for living costs and food...  I will also have quite a low income for 2 years by then, so the parental income will be low, too.

Also, as the other poster said -- buy all kid-related expenses (computer, clothing, food, vacation) with the custodial account during college years will draw it down quickly at the start, so they can qualify later.  If it is too big for this, then maybe applying for aid is not a real concern.  ?

If you charge them rent, it will throw up a red flag because it will be seen as tax evasion, same with the food. Again, parental income is what will likely knock them out of subsidized student loans, and no you do not need subsidized student loans to get work study.  And federal grants require a much lower asset/income amount than work study/subsidized student loans.

[tonysemail]

Hi and welcome to the forums.

custodial accounts become the minor's property when they turn 18.
are they responsible enough to spend their savings on college education rather than buying themselves a new car?

[Goldielocks]

The goal is for the kids personal accounts / funds to be low to warrant federal student loans, in order to be eligible here for a combination of scholarships and study/work arrangements at the university..  (which only students with federal loans qualify for).

To do this:
We (maybe) plan to charge the kids  (low) rent the first year they live at home, to bleed off their personal accounts, and allow them to apply for aid in years 3 or 4 with fewer personal assets. This is allowed by the student loan calculations which assume kids at home pay $500 per month for living costs and food...  I will also have quite a low income for 2 years by then, so the parental income will be low, too.

Also, as the other poster said -- buy all kid-related expenses (computer, clothing, food, vacation) with the custodial account during college years will draw it down quickly at the start, so they can qualify later.  If it is too big for this, then maybe applying for aid is not a real concern.  ?

If you charge them rent, it will throw up a red flag because it will be seen as tax evasion, same with the food. Again, parental income is what will likely knock them out of subsidized student loans, and no you do not need subsidized student loans to get work study.  And federal grants require a much lower asset/income amount than work study/subsidized student loans.

Gin, I think we are in different countries.   The "live at home" financial need calculation here assumes that the student spends $500 per month or more on living and food accommodations, and the work study does require a federal loan to qualify, unless they have more than students that will accept them.

The point is that with a custodial account, the kids could spend it on a fancy trip to disneyland, and the final result is a lower value in the account, showing a greater need in future years.   Due to stupidity?  Yep.  But they dont' consider abusive spending in year 1 as a factor in year 3 applications....  So paying rent in years 1 and 2 to reduce the account is a better option, really.

[bb5999]

Thank you for the input everyone.

Here is what I am going to do. I am going to, over the next three years, liquidate the securities each kid has in their individual custodial accounts. I will do it over time because there are tax implications. It is my understanding that the first $950 in earnings is taxed at their tax rate, but anything above that gets taxed at my tax rate. So by drawing the sales out over several years, taxes will take a bit less of a bite. Today, I made the first sale for each kid. I also talked to Vanguard. I am opening up a custodial 529 for each of them. As I generate the cash in the original account, I will move it over to the new 529 and put money in an appropriate Vanguard fund or two. I will keep doing this, at a pace appropriate to keep taxes in their brackets, until custodial accounts are almost drained. I will maintain a few thousand dollars in each of their original accounts for purchase of a new laptop and maybe some other supplies, during their senior years of high school.

I found conflicting information about whether the custodial 529 is viewed as the same type of asset as a regular 529, by FAFSA. But because of this: "But the College Cost Reduction and Access Act of 2007 changed the treatment of custodial 529 plan accounts owned by a dependent student, starting with the 2009-10 award year. When a dependent student owns a 529 plan, the 529 plan is treated as though it were a parent asset on the student’s FAFSA. This yields a more favorable treatment, since student assets are assessed more heavily than parent assets. " am convinced that going this route is the right way to go.

Source of quote: https://www.fastweb.com/financial-aid/articles/confusion-about-reporting-custodial-529-college-savings-plan-accounts-on-the-fafsa

[tonysemail]

I did just about the same thing.
But I think you can tax harvest up to $2000 of capital gains before the kiddie tax pushes earnings up to the parent's tax bracket.

You can do a google search like this to find more threads on the topic-
site:forum.mrmoneymustache.com kiddie tax