FEBRUARY 8 , 2010 VOLUME 17, NUMBER 4
A recent case out of Kentucky deals with a fairly arcane legal question, but it gives a chance to remind people about UTMA accounts and the rules governing them. The issue in that case: what duties does a UTMA custodian have to account to the minor beneficiary after he or she reaches the age of majority?
For the uninitiated, UTMA refers to the Uniform Transfers to Minors Act. It has been adopted in some form in forty-eight states (the holdouts: South Carolina and Vermont, both of which still rely on the earlier and similar Uniform Gifts to Minors Act, or UGMA). It basically creates a simplified statutory trust-like arrangement. Want to give money to a minor? Just pick a custodian and title the gift to “John Doe, Custodian under the UTMA for benefit of Janet Doe.” There’s not even any magic about those words — the most important thing is that the letters UTMA appear in the title.
When you create such an account the money does not belong to the named custodian, but to the minor beneficiary. Depending on the source of the money (and your state’s variant of the UTMA), the minor is entitled to receive the remaining funds at age 18 or 21. In the meantime the custodian, like a trustee of a trust, can decide to use the money for education, health or other benefits for the “minor” (remembering that the beneficiary can sometimes be over 18 but younger than 21).
That’s the arrangement Allyne M. Peter set up for her grandson Emil Peter IV back in 1983. She left over $83,000 in a UTMA account naming her son Emil Peter III as custodian. Over the years some of that money was distributed to her grandson, but in 2007 — years after he had turned 21 — Emil Peter IV decided his father hadn’t given him enough information so that he could figure out whether there should still be money in the account. So he sued his father to compel an accounting for the UTMA account.
Emil Peter III argued that the UTMA statute required such suits to be brought in a lower Kentucky court, and that his son’s suit should be dismissed. One problem with that: he also made clear that he thought the same statute required the beneficiary to still be a minor when he brought the suit, so his reading would leave his son with no court in which to challenge his father’s administration.
The issue in the Peter family dispute is arcane, and it would not arise in Arizona (because both kinds of suits would be brought in the same court). But it does give us a chance to reflect that the custodian of a UTMA account is much like a trustee in a number of ways. One similarity: both types of fiduciary must be prepared to account for the administration of the money they handle.
That was what the Kentucky Court of Appeals decided. Even though it might not be crystal clear whether the UTMA could be read as requiring that any suit be brought in the lower court, the possibility that neither court might have authority made the appellate judges determine that Emil Peter IV’s current proceeding should continue. Peter v. Schultz-Gibson, January 29, 2010.
The legal issue might seem arcane to non-lawyers, or to residents of states with only one choice of trial court for UTMA accounts, but it probably doesn’t feel all that arcane to Brandon Gould. That’s because last spring he brought a similar action against his grandmother in the New York Surrogate’s Court. The New York UTMA statute, like the Kentucky version, authorizes minors over the age of 14 (or a family member acting on their behalf) to bring an action in a lower court — in New York, the Surrogate’s Court. Brandon’s grandmother argued that because Brandon had turned 21 (the age of “majority” for New York’s UTMA law) several months before filing the action, he could not use the lower court. The New York Surrogate agreed and dismissed Brandon’s lawsuit — arguably the same fate that would have awaited Emil Peter IV if he had filed in the lower Kentucky court. In Re Gould, May 26, 2009.
The disposition of both Emil Peter IV’s and Brandon Gould’s lawsuits really beg the question. What is the accounting requirement under the UTMA statute?
The law itself does not provide much guidance (you can look at the truly “uniform” UTMA statute at the website of NCCUSL, the organization that promulgates uniform laws in the U.S.). Section 12 of the Act does require the custodian to “keep records of all transactions,” and to “make them available for inspection” by the minor or the minor’s parents or guardian. The part of the law disputed in the Peter and Gould cases, Section 19, permits a minor over age 14, a guardian or a family member to demand an accounting — but leaves ambiguous what rights the “minor” has after reaching the age of majority.
Still, it is clear that the custodian is a fiduciary and must use the money for the benefit of the minor. UTMA money may not be commingled with other money, income in the UTMA account should not be reported under the custodian’s Social Security number, and the custodian may not use UTMA money for his or her own benefit. One way or another, the minor can compel an accounting and release of the money when he or she reaches the appropriate age (18 or 21, depending on the state and circumstances).
An account set up under your state’s UTMA can be a streamlined, simplified way of giving (or leaving) money to a child, a grandchild or anyone else under age 21 (or, in some cases, 18). It can save time, cost and headaches associated with setting up a more formal trust arrangement, and it certainly makes tax preparation easier for the custodian (taxation simply flows to the minor beneficiary, with no separate return required for the account itself). Selection of the custodian is critical, however — you should choose someone who appreciates that the funds ultimately belong to the minor beneficiary, and must be turned over to him or her at the appropriate age, together with a complete accounting.