Q: When you transfer a UGMA account to a joint Tenants in Common account - are there any tax penalties for the joint owner?
Transferring a UGMA account to the now of-age beneficiary. We have the option of transferring to a joint Tenants in Common account with 80% ownership to the primary beneficiary and 20% to joint account holder (former custodian). Would there be any tax penalties or tax ramifications for the 20% owner if this is set up this way? Funds in account are mostly cash and the 20% amount equals $8,500 -- less than an amount allowed for yearly gifting before tax reporting is required by the IRS. Would doing it this way be considered a gift to the 20% owner? Not sure how this is viewed in the eyes of the IRS since the new account would be held at a financial institution using the beneficiaries social security number and we have been told they would report any account activity on their tax returns. Any info appreciated.
A: The person who set up the UGMA (grantor) and put money into the account--for the benefit of a minor--can withdraw any or all of the money at any time. If the account drew interest over the time it existed, the interest will be (or perhaps already has been) reported to the IRS as interest received by the grantor just like any other interest bearing account.
All the money on deposit can be accessed by the minor after they turn 18. After the minor is 18, cashing or transferring the UGMA to another account can be done by the grantor or the minor--or both, as in this instance. If the amount received by the minor exceeds the maximum IRS gift amount someone must pay the gift tax--of it could be paid out of the money in the accounts. The amount received by the grantor is tax free because the grantor deposited it--presumably from funds already taxed.
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