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College Planning Q&A: 529s in Trusts

UTMA funds placed into 529 still subject to trust.

Susan T. Bart, 03/24/2006

Every month, college-savings expert Susan Bart answers advisors' questions on 529 plans and other education-planning matters.

The purpose of this column is to provide general educational information for investment professionals. For obvious reasons, Susan cannot give advice regarding specific clients or actual matters. Thus, only hypothetical questions, seeking general information, can be answered. Questions that involve real people or real matters will not be answered.

E-mail your questions to advisorquest@morningstar.com.

**Be sure to check out Susan's book, "Education Planning and Gifts to Minors 2004 Edition." Click here for more information.

Q. A few years ago, as a custodian, I cashed out from an UTMA account and invested the money into a 529 account. Is the 529 account now an asset of the child or the custodian parent? Is this new account called UTMA 529? Does this 529 account enjoy all the privileges of a new 529 account?
Susan: Uniform Transfers to Minors Act funds placed in a 529 savings account are still subject to the UTMA, and the beneficiary could go to court to pursue remedies against the custodian if the custodian's actions are contrary to the UTMA. A custodian who withdraws funds from a UTMA account and reinvests those funds in a 529 savings account should notify the program manager that such funds are subject to the UTMA so that appropriate restrictions are placed on the account.

What the UTMA 529 savings account is called may vary from state to state, but, for example, in California it is called a custodial account. The Disclosure Booklet for the Golden State ScholarShare College Savings Trust describes how custodial 529 accounts are managed:

Custodians for minors under CUTMA may open custodial Accounts in the ScholarShare program by completing and mailing an Account Application - Custodial Account. The ScholarShare custodial Account must either be funded with proceeds from the sale of assets held in a custodial account already established under CUTMA or established in the program as a newly created custodial account under CUTMA.

Unlike individual Account owners and entity Account owners, a custodial Account owner opens the ScholarShare Account and conducts transactions on the Account purely in a representative capacity as a custodian acting for the benefit of the minor Beneficiary, who is the legal owner of the Account. Therefore, a custodial Account owner is not permitted to change the Beneficiary of the Account, transfer any funds from the custodial Account to another ScholarShare Account, make any Rollover Distributions, change the ownership of the Account, or name a Contingent Account owner.

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