Oftentimes, well-meaning parents or grandparents set up a custodial account for their child under the Uniform Transfers to Minors Act (UTMA), but later realize they should not have done so. What then? This article will discuss why you may regret setting up a UTMA for your child. The next article will discuss ways to dismantle the account.
What Is a UTMA?
In a nutshell, a UTMA is a custodial account that legally belongs to the child, but is being overseen by a custodian (usually a parent) until the child comes of legal age and can take over the account himself or herself. In California, the legal age is 18, but may be 21 in other states. The custodian of the account may only use the money in the account “for the use and benefit of the minor,” which is quite broad, but certainly does not allow for withdrawals because a parent regrets putting in the money and wants to use it for other things.
Why You Might Want to Undo a UTMA
UTMAs are easy to set up. Many brokerages and banks will gladly set up an account without fully disclosing all the pros and cons of using this type of estate planning vehicle. People often think UTMAs are cheap and easy alternatives to setting up a child’s trust (which requires professional attorney services) and thus go down the UTMA road without realizing all the issues that might arise.
Here are some common problems with UTMAs that make parents regret creating one for their child:
- Your teenager is a teenager. Many parents who set up the account when their child is still young think that it would be a good way to provide their kids with financial aid for college. Unfortunately, until their child is on the cusp of taking over the entire large sum, they may not realizethat their 18-year-old is not mature enough to handle all of that money wisely. Perhaps their child, like any normal teenager, differs in her view of how that money should be spent (e.g. on trips abroad instead of tuition bills).
- Hurting financial aid options. On the other end of the spectrum, parents may regret setting up the UTMA because it actually significantly restricts their child’s eligibility for financial aid. The account is seen as the child’s asset and thus most financial aid formulas impose a penalty for those funds.
- They need the money back. Sometimes parents put in a large amount of money in a child’s UTMA and then realize at a later point that the money can be better spent elsewhere. Perhaps they suddenly hit an unexpected patch of unemployment or illness, or they need the money for a down payment on the perfect family home.
- Surprise siblings. It may be the case that a parent set up a UTMA for a child thinking that they were done growing their family, and then later on unexpectedly had another child or adopted. If the parents are not wealthy enough to set up comparable UTMAs for their newer additions, they may regret giving so much to the first child and sowing possible seeds of discord among the siblings.