Uniform Transfer to Minors Act accounts allow a person to leave funds to a minor beneficiary without a court’s interference. In general, minors are not legally able to own property. If a minor comes into possession of a bank or investment account or proceeds from a life insurance policy or retirement plan, a court may have to appoint a guardian over the property. UTMA accounts sidestep this requirement by naming a custodian over the funds: the custodian oversees and invests the funds until the minor turns 21 years old.
However, just because UTMAs avoid court oversight, does not mean they are devoid of other problems:
- Poor Investment Decisions: A custodian who invests the funds poorly relies on state law to determine their liability. Yes, they must act as a fiduciary over the account, but the UTMA account does not have the same flexibility to minimize (or enhance) the custodian’s investment liabilities.
- Custodian Never Informs the Beneficiary: While the custodian is supposed to inform the beneficiary of the funds when they attain 21 years of age, the custodian may judge that, in her opinion, the beneficiary is not ready to receive them, or may not be close to or even resent the beneficiary. This is not permitted by law, but is hard to oversee, since financial institutions have no responsibility to inform the beneficiary of the UTMA account’s existence.
- Custodian’s Death May Result in Estate Tax On the Funds: If a custodian passes away, the UTMA funds are included in his or her gross estate. If the custodian was wealthy, the UTMA funds may be subject to estate taxes based on tax consequences completely beyond the beneficiary’s control.
- Income Tax Requirements: An UTMA may have to file income taxes if it generates enough income. While this is a requirement for most people, if a deceased individual leaves funds to 8 grandchildren’s separate UTMA accounts it may have instead been less expensive to hold the funds in trust to simplify income tax preparation.
- The Minor May Not Be Sufficiently Mature To Accept the Money. Just because a person turns 21, it does not mean that he is smart enough to handle the money. Drugs / gambling / immaturity / – lots of problems plague us when we are 21. Yet by law, the custodian has to turn the money in the UTMA account over when the beneficiary turns 21, regardless of the minor’s ability to handle the funds.
UTMAs do have an important place in transferring wealth to minors. As a general rule, transfer small bequests via UTMAs (and larger bequests in trusts), choose a custodian who is financially responsible and healthy, and consider informing the beneficiary’s parents of the UTMA account so a non-parental custodian doesn’t sit on the account indefinitely due to a perceived difference with the beneficiary.