The Uniform Transfers to Minors Act (UTMA) allows gift givers to transfer money – or other gifts like real estate or fine art – to a minor child without the need for a guardian or trustee. Many people who want to give money to minors like the convenience of establishing a UTMA account – they simply go to their local bank, set up the account, transfer the funds and they are done. On the surface, it is straightforward and easy. In reality, UTMA’s are often more complicated and risky than they seem.
With a UTMA account, you name a custodian – often another family member – to hold the funds for the minor until the minor reaches a designated age. For example, if you transfer $50,000 to a UTMA account for your grandson Billy and name Billy’s uncle as the custodian, when Billy reaches a certain age, the custodianship will terminate and the funds will be distributed to Billy. The age is designated by the state statute where you set up the UTMA account. For example, in Massachusetts if the property is gifted to Billy, he will receive the money at age 21. In addition, once he turns age 14, little Billy can petition the Massachusetts probate court and ask that the court order his uncle to give him some of the money.
Understanding the “fine print” of your state’s UTMA laws is critical if you don’t want your child, grandson or niece to have access to the gifted assets at a relatively young age.
Here are some issues to think about.
Consider establishing a trust instead of a UTMA. A trust will allow you to choose the age that the child receives the assets, or allow the trustee to keep the assets in trust until the child is old enough to personally manage the assets.
Decide when your minor should have access to the money. It used to be that 18 was the age when minors were considered old enough to handle their own assets, and 18 is still the age of legal majority in most states. However, in the estate planning world, the age that most people give young adults full control of assets has crept up over the years. In drafting trusts, the default age of 18 has increased over the years to age 21, then age 25, and now it is common for age 30 or 35 be used.
Know your state law. Some state’s UTMA laws have kept up with this trend of prolonging minors’ access to assets. Florida, for instance, allows the custodial property to remain in a UTMA account until the minor reaches age 25 as long as the person making the gift expressed that intent. However, many states do not offer that flexibility. If the child is not able to handle the funds at the designated age, problems can arise.
MORE FROM FORBES ADVISORDismantling a UTMA is hard. As the child reaches the designated age, many people will try to undo UTMA accounts, which is challenging. Once the child reaches the designated age, the custodianship terminates and the child is entitled to the assets. If you want to do anything else with the assets, you will need the child’s consent and signature.
Think about the future value of the account. One of my clients transferred stock to a UTMA account for his child that increased in value to $6 million. When the child turned 21, he was entitled to the money under the state’s UTMA laws. Unfortunately, the child was not capable of handling the assets. One option in dealing with this issue is to ask the child to transfer the assets to an irrevocable trust for the child’s benefit. Another possibility is to go to court and ask the court to intervene and establish a trust for the child or appoint a conservator.
UTMA’s can be useful. If you are transferring a relatively small amount of money to a minor who seems reasonably well adjusted, a UTMA account may make sense. Typically, you do not need to set up an irrevocable trust for a small amount of money.
Remember to file a gift tax return (if needed). If you do establish a UTMA account, do not forget to file a gift tax return if the gifted amount is over $15,000. It is not uncommon for clients to transfer a few hundred thousand dollars to UTMA accounts for children or grandchildren without filing a gift tax return.
Before you make a decision, think through all of the implications of creating a UTMA. The ease of use may not outweigh the consequences of the child’s access to the assets down the road.