Posts Tagged ‘UGMA’

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.

UTMA Custodian Accountable After Beneficiary’s Majority

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.

Claim Against UTMA Custodian For Taking Funds Filed Too Late

OCTOBER 28, 2002 VOLUME 10, NUMBER 17
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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