Posts Tagged ‘custodian’

UTMA Account Is Treated Like a Trust Account

JUNE 11, 2012 VOLUME 19 NUMBER 23
The Uniform Transfers to Minors Act is almost universally known by its initials: UTMA. A version of the Act has been adopted in nearly every US state, and the few which have not adopted it have its similar predecessor, the Uniform Gifts to Minors Act (known, unsurprisingly, as UGMA).

The UTMA is intended to make it easy to put money aside for minors. It allows someone to create a sort of trust arrangement, just by including those magic initials in the title to a bank or brokerage account — or, in fact, on any property. The account title identifies the minor beneficiary, the custodian who manages the property, and the fact that it is a UTMA account. It’s simple: just title the bank account as “Jane Doe, custodian pursuant to the Arizona UTMA for benefit of Johnny Doe.” It’s not even essential that precisely those words be used (obviously, you wouldn’t want to use them unless you were trying to give money to a child named Johnny Doe).

That is the easy part. Then come a lot of questions. Such as:

  • Who owns the money in a UTMA account?
  • Whose Social Security number should go on the account?
  • How can the money be invested? What can it be spent for?
  • What accounting requirements are involved?
  • Does the money have to be turned over to the child when he or she becomes an adult?
  • What standards apply to the handling of the money?
  • Can anyone else demand money from the account, or information about it?
  • Are there limits on how much money can go into a UTMA account? Are there limits on what kind of money can go into the account?

Once set up, the UTMA account belongs to the minor. The custodian has the ability to manage it, but does not own the money and can not use it for his or her own benefit. It should be treated like a trust for the benefit of the minor. The minor’s Social Security number should be provided to the bank or financial institution, and the minor will need to file tax returns if the income is high enough to require returns. When the minor reaches a set age (in most states and most cases, the age is either 18 or 21 — check with a qualified attorney about your state and circumstance) the custodian must turn over the funds. The minor — and the minor’s parents or other close family members — have the right to demand account information, and the custodian has an obligation to provide that information.

Those are the basic rules, but of course specific answers will depend on the details of each question. But a recent North Carolina case gives some guidance to help analyze UTMA accounts — and it provides a cautionary tale about the use and misuse of UTMA funds.

In 1996, when shares in the family business were sold, Elwood Blake (not his real name) set aside a portion of the sale proceeds for the benefit of his granddaughter, then three years old. He named his son Richard Blake as custodian of the funds, pursuant to the North Carolina version of the UTMA.

Five years later Richard Blake and his wife Elaine separated, and a bitter and protracted legal struggle ensued over property division, custody of their children and, eventually, administration of the UTMA account for the benefit of their daughter. Elaine Blake demanded an accounting from her ex-husband and ended up filing a court proceeding to secure it.

After a court battle the judge hearing the case decided that Richard Blake had mishandled his daughters funds in a number of ways. He had been unreasonable in his refusal to provide accounting information. He had made speculative investments (including putting more than $50,000 into a venture capital fund). He had used his daughter’s funds to pay her medical and dental bills, when he should have been responsible for them himself. And he had used $5,000 of his daughter’s money to make a contribution — in his own name — to a local Republican Party cause.

The judge ordered Richard Blake to return $73,269.80 to his daughter’s UTMA account. It also ordered him to repay another $58,944.24 in lost investment earnings occasioned when he misused his daughter’s money. Then it ordered him to pay his ex-wife’s legal bills for having to bring the action — her legal fees totaled another $138,531.85. Finally, it removed him as custodian from all the UTMA accounts, finding that his mishandling precluded him from being in charge of the remaining funds or the money he must put back.

The North Carolina Court of Appeals reviewed the trial judge’s rulings, and found nothing wrong. There was plenty of evidence to support the judge, the appellate court ruled, and Mr. Blake should have treated his daughter’s UTMA account like a trust. When he did not, he became liable for the misused funds, the lost interest and the legal fees incurred in protecting his daughter’s interest. Belk v. Belk, June 5, 2012.

An interesting side note: “Richard Blake” already had a checkered history with the law. A lawyer and prominent businessman, he had won a seat as a local judge after criticizing his predecessor — the judge who handled a part of his divorce proceeding. When he refused to step down from his position on the Board of Directors of an auto-parts company the North Carolina Supreme Court removed him from his judicial office and banned him from serving in any future judicial position.

Uniform Transfers to Minors Act Accounts in Arizona: A Primer

One question we are frequently asked: isn’t it a good idea to set aside money for a child or grandchild, and isn’t a UTMA (Uniform Transfers to Minors Act) account a simple way to do that? OK — that’s really two questions. Our answers: Yes, it is a good idea to set aside money. Yes, the UTMA account is a simple way to do it. Don’t set up a UTMA account, however, until you understand the consequences.

There are confusing issues about UTMA accounts. Sometimes the confusion is heightened by the fact that each of the 48 states which have adopted versions of the UTMA Act has changed it a little bit — so what is true in Arizona may not be true in another state (and vice versa). Rather than indulge in all that confusion, however, we are going to tell you in straightforward language what to watch for in Arizona. Be careful about applying these principles to other states’ UTMA acts.

First, the good news. Here are the positive things about Arizona UTMA accounts:

  1. They are inexpensive to set up and to administer. They do not require a lawyer, and avoid courts and formal accounting requirements altogether. All you have to do to create an Arizona UTMA account is to include the name of a custodian, the name of the beneficiary, and the letters UTMA in the title. This will work: “John Jones as custodian pursuant to the Arizona UTMA for the benefit of Marie Smith.”
  2. A UTMA account can simplify the gifting of substantial amounts of money by multiple family members. Set up an account for your 2-year-old, and all four grandparents can put $13,000 each into the account each year (using 2011 numbers — the maximum non-taxable gift may go up next year or in future years).
  3. They automatically end at 21, so the money will not be tied up indefinitely. One of the points of confusion: sometimes UTMA accounts end at 18 in other states, and in some circumstances in Arizona. But if you are putting your money into an account for a minor in Arizona, the end date is age 21.
  4. They encourage regular savings by simplifying the process. Open an account with, say, $1,000, and put $50/month into the account. You won’t save a fortune in 15 years, but you will have $10,000 that you wouldn’t otherwise have saved without this discipline. Plus the earnings and growth on the investment, as a bonus.
  5. If the minor receives public benefits like SSI or Medicaid, the money will usually not be treated as “available” (and therefore reduce or eliminate benefits) until age 21.

Of course it’s not all good news. Here are some problems or limitations:

  1. The money in the UTMA account will need to be reported on the minor’s FAFSA (Free Application for Federal Student Aid) form when applying for student aid — and it will be treated as completely available to the student. In other words, the very existence of a UTMA account may prevent receipt of needs-based student aid.
  2. The income in the UTMA will be taxed at the minor’s parents’ income tax rates. Unless, of course, there is so much money in the minor’s name that his or her rate is higher — then the UTMA account will be taxed at that higher rate.
  3. The minor may have to file an income tax return if the UTMA money produces significant income. The UTMA account may be used to pay any income tax due, and the tax preparation costs, but it will require that a return be prepared.
  4. At age 21 the (former) minor is entitled to receive all the money. Period. It doesn’t matter if he or she has become a drug addict, a spendthrift or a cult member.
  5. If the (former) minor receives public benefits like SSI or Medicaid, at age 21 the UTMA account becomes an “available” resource and may compromise those benefits.
  6. If the UTMA custodian is the parent of the minor (which is by far the most common arrangement), then there may be additional complications in how the money can be used and/or what tax effect the money might have. Since a parent has an obligation to support his or her minor children, the UTMA account generally can not be used by a parent/custodian in ways that reduce or satisfy that support obligation. If, on the other hand, the donor of the money acts as custodian, he or she may not have gotten the money out of his or her estate (which is usually one intention on the donor’s part).
  7. Although UTMA accounts are usually seen as simple mechanisms avoiding lawyers and conflict, the custodian still has an obligation to give the minor (or his or her guardian) account information. Thinking of giving a divorced and non-custodial parent money for the benefit of his or her minor child? Know that you are inviting a dispute between the custodial parent and the UTMA custodian over how the money is invested and spent (or not spent).
  8. What happens if the custodian dies or becomes incapacitated? There is no easy mechanism to select a successor custodian; it may require a court proceeding to name a successor. A fourteen-year-old minor may be able to select his or her own custodian, which could raise concerns for a thoughtful donor. (Note: Arizona law does allow the current custodian to name his or her own successor custodian, but few do. If you are planning on setting up a UTMA account, insist that the custodian select a successor.)
  9. What happens if the beneficiary dies before reaching age 21? The money goes to his or her estate — which may require a probate proceeding (if the total is over $50,000 in Arizona) and usually means that the money will be split between the child’s parents. That may be fine, but it may not be what the donor intends or wants.
  10. The effect of interstate proceedings is unclear. If you live in New Mexico and set up a UTMA account in an Arizona bank with an Arizona custodian for a minor who lives in Iowa, what happens when your custodian moves to Wisconsin? What courts might the custodian have to answer to, and whose law applies in the case of a disagreement? Fortunately, this problem seldom arises — there are few legal proceedings involving UTMA disputes. But they do happen, and increasingly so in an increasingly mobile society.

What are your alternatives to a UTMA account? Consider 529 plans for educational purposes, and separate trusts if the money is intended to be for more general use. For a child who earns income an IRA might even be an appropriate choice — if the child earns $3,000 in a given year, he or she can contribute up that amount to an IRA (and the source of the money does not have to be the earnings). Talk to your financial adviser and your lawyer about the cost of the various options, the problems they raise, and the best alternative in your circumstances.

Claim Against UTMA Custodian For Taking Funds Filed Too Late

Allan Levine thought it was a good idea to set aside some money for his young grandchildren, Derek and Danielle Levine, and so in 1987 he established investment accounts for them. He used a popular and easy way of setting aside the money—he created accounts under the Uniform Transfers to Minors Act, or UTMA, listing himself as custodian. Apparently, however, Mr. Levine did not understand that the UTMA accounts really belonged to his grandchildren.

In December, 1995, Mr. Levine withdrew almost $125,000 from the two accounts and placed the proceeds into his own living trust. That trust provided that it would benefit Mr. Levine for the rest of his life, and that it would go to his wife Karen Levine upon his death. In other words, Derek and Danielle Levine would no longer receive any portion of the money that had been set aside for them.

Mr. Levine died in 1999. Because he had established a living trust, there was no probate required—his entire estate passed directly to his widow. His granddaughter Danielle was 17 at the time of his death, and grandson Derek had just turned 18 four months earlier.

Eighteen months after Mr. Levine’s death his grandchildren sued his widow, claiming that they were entitled to a portion of the money she had received from their grandfather’s trust. She moved to dismiss, not because he had the right to withdraw money from the UTMA accounts but because state law bars suits filed more than one year after the death of the defendant, and the grandchildren’s claim was really against Mr. Levine’s estate. The trial judge dismissed the lawsuit.

The general rule is that the claim of a minor is not foreclosed while he or she is still a minor. Danielle Levine argued before the California Court of Appeals that she had filed her lawsuit less than one year after reaching her majority, and that she should be allowed to prove that her grandfather had breached his duty to her by taking back his gift. The Court of Appeals disagreed and allowed the dismissal to stand. Levine v. Levine, October 17, 2002.

Mr. Levine’s behavior was not all that uncommon. Parents and grandparents often set up UTMA accounts for their offspring, then later decide they want their money back. Had Derek and Danielle Levine filed their lawsuit against their grandfather before his death, or against his estate within one year after his death, they would probably have prevailed; the UTMA money was not Mr. Levine’s to do with as he pleased, even though he was still listed as custodian on the accounts.

Arizona, like California, has adopted the UTMA—and the rules are similar in Arizona. Some states (and some older accounts) may still refer to the predecessor to the UTMA—the Uniform Gifts to Minors Act or UGMA. The rules governing UGMA accounts will also be similar. Money set aside in a UTMA (or UGMA) account no longer belongs to the donor, even if he or she remains as custodian.

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