UTMAs-- custodial investment accounts for minors-- are great for a lot of things. Parents or grandparents can open them for minor children, choose or let them choose investments, and growth and earnings are the child's (though potentially taxed at the parents' rate) and subject to the lower capital gains tax rates.

One thing UTMAs are not good for is financial aid. That's because unlike a 529, which is considered the parent's asset on the FAFSA and CSS Profile, UTMAs are the student's asset. Student assets are assessed at 20% of their value, not 5.64% as are parent assets. So $10,000 in a UTMA can cost a student $2,000 in financial aid, whereas that same $10,000 in a 529 would only reduce financial aid by $564.

Fortunately there's a workaround for this: converting the UTMA to a 529. When you do this, you sell the assets in the UTMA and transfer the proceeds to a new 529.

There's a catch, right? Yes, of course there's a catch. A few of them, actually:

• Kiddie Tax: In order to discourage parents from transferring assets to children for purposes of tax avoidance, any unearned income in excess of $2,500 that a dependent child receives is taxed at the parent's rate. This includes any dividend distributions that UTMA account assets generate as well as capital gains from selling the asset. Parents can include this income on their own tax return (which would result in its being included on their FAFSA and CSS Profile if it happens during an income year that is reported) or have the child file a tax return.

• New 529 account: The money can't go into an existing parent-owned 529 because the UTMA is the student's property; a special 529 is required for transfers from a UTMA. Nonetheless, because the new account is a 529, it's treated as a parent asset for financial aid purposes.

• Taxable income from sale of investments: Assets in a UTMA account cannot be transferred "in kind" to a 529; they need to be sold first. Selling in a taxable account can generate capital gains which are reported on your tax return. This is especially the case when a UTMA account was set up and funded when the child was born and it's now 17 years later.

If your student has a UTMA account, now is a great time to make a plan for it. The first step in deciding what to do with a UTMA is to determine if your student is eligible for need-based financial aid. Use the Student Aid Estimator to figure this out. If your Student Aid Index is higher than the cost of attendance at colleges, then you do not need to make any changes for financial aid purposes.

If you are eligible for financial aid, the next step is to determine your cost basis in the UTMA account and how much unrealized gain is in the account. Cost basis is what you paid for the investment when you bought it; unrealized gain is the difference between cost basis and the current market price. If you purchased an investment for $4,000 and it's now worth $10,000, then your cost basis is $4,000 and your unrealized gain is $6,000.

If your unrealized gain is less than $2,500, you can simply sell the investment, set up a 529 account to receive the funds, and transfer the proceeds over.

If your embedded gain is more than $2,500, it's worth considering how much you should convert now, and how much to do in future years. If you are several years out from college, you can start an annual plan of realizing $2,500 of gain in the UTMA each year until you have used up all the gain at your child's tax rate. This is a good strategy for a student who is several years from college since you'll save a lot on taxes: if your student is in the 12% or lower federal tax bracket, then their federal capital gains tax rate is 0%.

While your student's tax return info would be reported on the FAFSA, students get an income protection allowance of $11,510 on this year's FAFSA, so it's unlikely that the capital gain income will impact them in the formula.

If your student is filing a FAFSA this year and is eligible for need-based financial aid, it can still be worth realizing a larger gain that's taxed at the parents' rate in order to transfer UTMA assets to a 529. The assessment rate for the 529 is 14.36% lower than for the UTMA, and that rate applies to the entire account balance. The long term capital gains tax rate is 15% plus your state's rate, but that tax only applies to the gain. Assuming the above $10,000 investment with a $6,000 unrealized gain, here's the math for an Oregon taxpayer (given our 8.75% tax rate, it's unlikely that you could be worse off on the tax side in another state):

• $10,000 529 vs UTMA = $1,436 additional financial aid eligibility

• $6,000 long term capital gain with $2,500 taxed at child's rate and $3,500 at parents' rate = $131.25 state tax on child's portion + $525 federal capital gains tax on parents' + $306.25 state income tax on parents' = $962.50 tax cost

In that case, the student's aid eligibility increases by more than the combined tax liability. (This assumes 15% federal capital gains rate because the student is eligible for financial aid.)

Although one could roll UTMA assets to a 529 at any point prior to college, families with multiple children are usually best off leaving assets in the UTMA until the year in which the student's first FAFSA will get filed. That's because the student or a sibling might apply to colleges that require the CSS Profile, and the CSS Profile requires all the family's 529s to be reported. If this is the case for you, annual sales within the UTMA to realize up to $2,500 in unearned income can be beneficial to avoid a future kiddie tax liability.

And as always, consult with your tax professional before making any moves that have tax consequences.