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UGMA Tax Question

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  • UGMA Tax Question

    Hi everyone!

    I had a question, was trying to find the answer online but was having difficulty.

    Spouse and I have 99% of our retirement (via retirement plans, roths, taxable account) in index funds (modified 3 fund portfolio).

    For years my father had a UGMA account with a single stock with me as the minor (I'm in my 30s, yes, I know I should have taken this over awhile back).

    He just signed over the account to me this week via Fidelity and it is now in my taxable account.

    Does anyone know how taxes would work out?

    1. If I sold the stock now, would it be considered a short term capital gain? Or is it long term since I was the minor custodian on the account with my father prior to having him transfer over to me vs Fidelity?
    2. I would assume that if it is the former (short term capital gain), I would have to hold for one year for it to be a LTCG?
    3. What is the cost basis for this? Is it from when the stock was originally purchased (over 30 years ago)? When I turned 18? Or a new cost basis is established now?

    Thank you everyone for your help.

  • #2
    My understanding is it is LTCG with a basis of when it was originally purchased. It's in a UGMA so legally it's been yours since the account was first opened.


    • #3
      dennis is correct. The UGMA has legally been yours since the account was established, your dad was simply in charge of management. LTCG.
      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


      • #4
        Not too mention. If there was any reportable income (dividends or capital gains), they should have been reported. Dividends could have been reported on your parent's(s') or your return while a dependent. Capital gains should always have been reported on your return. While a dependent they both would have been subject Kiddie Tax rules.

        Once you became an adult you were responsible for reporting any taxable income and paying taxes on that income regardless of whether you had assumed control of the UGMA account.

        Luckily, there is normally a three (3) year statute of limitations (SOL) on tax returns. It would be extended to six (6) years if any unreported income was > 25%.of your income. If you had taxable income from this account in the last 3/6 years, you should file amended returns and pay the unpaid taxes.

        It is a failure of a UGMA/UTMA custodian to not provide Form 1099s to the account owner or their parent (if a dependent). Unfortunately, the tax liability lies with the account owner and not the custodian.
        Last edited by spiritrider; 06-04-2022, 02:36 PM.


        • #5
          Thank you all. Very helpful. I may sell once it settles into my taxable since it has done really well this year (energy stock- would be selling high) and it will help to simplify my allocation.


          • #6
            I had UTMA accounts for both of my kids. The seed money was legacy stock that was gifted to them by a relative over several years, so the cost basis was considered zero whenever we sold the stock and put it into an index fund. When parents managing the UTMA account sell securities in the account, it is taxed at their capital gains rate (which may be why your father left it in a single stock). Depending on how much money you have in that single stock, you may want to strategize your plan for the capital gains tax. I love WCI‘s idea of gifting stock to charities if that fits into your charitable giving plan. That way you can flush it out of your taxable account and the charity does not pay capital gains on the gifted stock.

            It’s too bad that this was not given to you sooner when your capital gains rate was likely lower. Since transferring these accounts over to my children at age 21, they have been able to sell off some of the legacy stock in the year(s) after college when their income was low and take advantage of a zero capital gains rate. Fortunately they are both frugal individuals and they have continued to invest the money.

            You may also consider some tax loss harvesting if you decide to sell the single stock and invest the proceeds in an index fund, particularly if market volatility continues. That way you can cancel out some of the gains.


            • #7
              Originally posted by gardener View Post
              I had UTMA accounts for both of my kids. The seed money was legacy stock that was gifted to them by a relative over several years, so the cost basis was considered zero whenever we sold the stock and put it into an index fund.
              As has pointed out this was not correct. Gifted securities retain the cost basis of when the donor bought the securities. More capital gains taxes were paid than necessary.


              • #8
                Actually the donor’s husband helped to found the company where the stock originated (that is the meaning of legacy shares). Our accountants counseled us to use a one cent ( essentially zero) cost basis. But yes, otherwise I absolutely agree with you that you use the cost at which the security was purchased.
                Last edited by gardener; 06-11-2022, 10:24 PM.


                • #9
                  Thanks for the clarification.