Ezel / Tax Rulings / VA
VA P.D. 10-191 Individual Income Tax 2010-08-26

Could parents deduct contributions to custodial Virginia college-savings accounts when the children, not the parents, owned the accounts?

Short answer: No. Virginia's deduction required the contributor to be listed as the savings-account owner. The applications created UGMA/UTMA custodial accounts with the children as beneficiaries and the wife only as custodian. Under the VEST program description, the state deduction belonged to the beneficiary and was reported under that child's Social Security number; custodians could not claim it. The parents' contrary intent did not override the filed documents.

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This page answers the general question as of 2010. Ezel answers yours, under current Virginia tax law, with citations.

Currency note: this ruling is from 2010
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official published Ruling of the Virginia Tax Commissioner (Virginia Department of Taxation), issued as a redacted public document. It is based on the specific facts the taxpayer presented and the law in effect when issued; different facts or later changes in the law can change the result, and another taxpayer should not assume it applies to their situation. Virginia's retail sales and use tax is administered by the Department, but many Virginia local taxes, including the business license (BPOL) tax, business tangible personal property tax, and machinery and tools tax, are administered by local commissioners of the revenue. This summary is informational only and is not legal or tax advice. Consult a licensed Virginia tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page as a PDF) is the authoritative source for any reliance.
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Subject

Virginia Savings Trust account

Plain-English summary

Parents could not claim Virginia deductions for contributions to their children's custodial VEST college-savings accounts because the parents were not the account owners. They had established one account for each of three dependent children and claimed deductions for 2006 through 2008.

Virginia's statute defined a qualifying contributor as someone who contributed money and was listed as the savings-trust account owner. The applications instead established UGMA/UTMA custodial accounts: the children were beneficiaries and the wife was the custodian.

The VEST program description stated that the Virginia deduction for a custodial account belonged to the beneficiary, was reported under the beneficiary's Social Security number, and was unavailable to the custodian. The Department had to follow the statutes and filed plan documents, even though the parents said they intended to make themselves owners.

The assessments for all three years were upheld.

What this means for you

  • College-savings tax benefits depend on the legal account structure and named owner.
  • A custodian is not necessarily the owner for deduction purposes.
  • Review the account application before funding it if the contributor expects to claim a deduction.
  • Intent does not override the account documents actually filed with the plan.

Common questions

Who owned the custodial VEST accounts for deduction purposes?

The ruling treated the children as the beneficiaries entitled to the deduction, not the parents serving as custodians.

Could the wife claim the deduction because she was custodian?

No. The VEST program description expressly said custodians were not eligible.

What years were assessed?

2006 through 2008.

Citations and references

  • Va. Code § 58.1-322(D)(7).
  • Va. Code § 23-38.75, as cited in the ruling.
  • VEST Program Description dated January 1, 2010.

Source

Original ruling text

August 26, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you appeal the individual income tax assessments issued to * (the "Taxpayers") for the 2006 through 2008 taxable years.

FACTS

The Taxpayers, a husband and wife, invested in a Virginia Savings Trust account (VEST) for each of their three dependent children. For the 2006 through 2008 taxable years, the Taxpayers claimed a deductions for contributions made to the VESTs on their Virginia income tax returns.

Under audit, the Department disallowed the deductions because the Taxpayers were not listed as the owners on the accounts and issued assessments for the taxable years at issue. The Taxpayers appealed the assessments, contending that they intended to set themselves up as the owners of the VESTs.

DETERMINATION

Virginia Code § 58.1-322 D 7 permits an income tax deduction for contributions made by a contributor to a VEST established with the Virginia College Savings Plan. For purposes of the VEST, Va. Code § 23-38.75 defines "contributor" as "a person who contributes money to a savings trust account established pursuant to this chapter on behalf of a qualified beneficiary and who is listed as the owner of the savings trust account." [Emphasis added.]

The VEST Program Description (VESTPD) as of January 1, 2010, clearly explains the implications of establishing a custodial account. With regard to the income tax deduction for contributions, page 27 of the VESTPD states:

The Virginia state tax deduction for UTMA/UGMA VEST Accounts belongs to the Beneficiary, and is reported under the Beneficiary's social security number. UTMA/UGMA custodians are not eligible for the Virginia state tax deduction for Contributions made to an UTMA/UGMA VEST Account.

According to the VEST applications, the accounts were established as custodial accounts under the Uniform Gifts to Minors Act/Uniform Transfers to Minors Act (UGMA/UTMA). The children are listed as the beneficiaries and the wife as the custodian.

The Department must rely on Virginia statutes and documents filed with the Virginia College Savings Plan. Thus, while the Taxpayers may not have intended to open the VESTs as custodial accounts, the documentation provided indicates otherwise. Accordingly, the assessments for the 2006 through 2008 taxable years are upheld. An updated bill will be issued to the Taxpayers shortly.

The Code of Virginia sections and public document cited are available on-line www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Acting Tax Commissioner

AR/1-4202299887.D

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