Use Caution With UTMA Accounts

Many of you have been in this situation. Grandma or Aunt Tillie wants to give your child money or stock – not enough to warrant some more aggressive estate planning techniques, but enough that the donor wants the funds to be invested for the long term.  This is where the Uniform Transfer to Minors Act (UTMA) comes in handy.  A UTMA account is easy to set up – any bank or broker can help the donor and there is no need to create a trust document.  Almost any type of property can be held in the account. For simple situations, it may be ideal.

The account is opened in the name of a “custodian,” who could be a parent, grandparent, or actually any adult or even a financial institution. Make sure the donor names a successor custodian to take over in case the first one dies or fails to act.  If you are acting as custodian, you should name a successor now to take your place if you can no longer serve. I have seen more than one situation where a successor was not named, and in that case either a guardian must be appointed for the minor or an application must be made to the court to appoint a successor.  Having to take these steps involves additional time and expense and negates the simplicity of setting up a UTMA account in the first place.

A UTMA account is like a trust in many ways.  The custodian acts like a trustee, in that he/she holds the money and invests it (or lets it accumulate interest). The custodian decides when to spend the money and for what purpose – although the funds must only be spent for the use and benefit of the minor.

But there are substantial disadvantages to a UTMA account. It is much less flexible than a trust.  The balance must be distributed no later than age 21 (and in some cases at age 18), when many children are not ready to handle the funds, but the custodian has no choice or discretion in the matter.  There can only be one custodian at a time – so if the intended custodian is not good at handling money, the donor can’t name someone else to act with the custodian as investment advisor.  An account can only be set up for one beneficiary and once the beneficiary is named, the donor cannot take back the gift or redirect it to another beneficiary based on future circumstances. If these factors are important, you should reconsider the use of a UTMA account and create a trust instead.

 

Questions regarding this article may be sent to Publications@Capehart.com.

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