How to Undo a UTMA - Part II

The last article discussed some common reasons people have for wanting to dissolve a Uniform Transfers to Minors Act (UTMA) account set up in the past for their kids. Unfortunately, a UTMA is an irrevocable account and legally belongs to your child. This means you cannot simply terminate it like you would a living trust or your own accounts. The money technically belongs to your child and your child does not have the legal right to do anything with it (including give it all back to you) until he or she reaches the age of majority, which is 18 in the state of California.

Nevertheless, if you feel that setting up a UTMA was a big mistake, there are some ways to mitigate it. The options listed below are in no way exhaustive and, in any event, it is important to discuss this matter with an estate planning attorney to make sure you don’t create even larger problems along the way.

  • Simply shut down the account. Although this gives your child the legal right to sue for his money back someday, it may be a good course of action in certain circumstances. Imagine a father puts in $400 in a UTMA account that is intended for his son’s college tuition. Soon after, however, he realizes that a UTMA is not the best way to give financial assistance to his son for college. He instead withdraws the money from the UTMA account and places it instead in a 529 plan. In this instance, it is extremely unlikely that the son would sue his father for withdrawing the funds from the UTMA and shutting the account down, especially since the funds were eventually given to the son for his benefit, anyway.
  • Transfer the money to a trust. A variation on the option above is to transfer the money from the UTMA into a trust for the child. If there is a substantial amount of money in the UTMA (as in tens of thousands of dollars), then a parent may realize that his 18-year-old daughter is not capable of handling that sum wisely for her college tuition, as was intended. Attempting to transfer money from a UTMA to a trust requires high legal expertise, so consulting an estate planning attorney is critical. However, having a good trust set up is well worth the cost and is probably what should have been done in the first place.
  • Substitute spending. Since a custodian may spend the UTMA funds “for the use and benefit of the minor,” a parent, as the custodian, may chip away at the funds and spend it down to a level that relieves whatever problems the account was causing. It may be a tricky issue to figure out what things fall into the “use and benefit” category, so again, consulting legal advice is critical.

If you have further questions about UTMAs or the best way to provide for your child through estate planning, contact Hannah Sargent, Alameda County probate and estate planning attorney today for a free consultation.