What Happens When You Want to Cancel a UTMA

The Child, Not the Custodian, Is the Owner of the Assets in the Account

Mother, father, and child sitting on a couch together, holding a globe

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When parents, grandparents, or other family members want to give kids a head start financially, they can use a variety of financial tools, including custodial accounts. The Uniform Transfer to Minors Act (UTMA) which governs these accounts says they can hold cash, securities, property, and other assets gifted to minors. Although the child is recognized as the owner of the UTMA account, they can't access the assets until they reach legal age, typically 18 or 21 depending on the state.

UTMA Account Restrictions

Under the UTMA, gifts made to these accounts are irrevocable, so there's no undoing them. The custodian, such as a parent, manages the account in the minor's interest, but the minor automatically receives full control of the account when they reach their state's age of majority.

Sometimes, families discover that these restrictions aren't what they expected when they opened the acccount. This may happen when someone has given stocks, bonds, mutual funds, real estate, private businesses, or other financial assets to a child within a UTMA account and then realized that despite having reach legal age, the child isn't mature enough to manage the assets responsibly.

Alternatively, the family may have a financial hardship, other children among whom they'd like to split the assets, or discovered that a student is entitled to less financial aid for college due to the UTMA, which must be declared as an asset of the child on federal financial aid forms.

In any case, the custodian of the account may be surprised to find out that they can't simply withdraw cash or sell the assets.

Transferring a Custodial Account to a 529

For families looking for flexibility with an existing UTMA, there are a few options, however.

You may decide to transfer the funds in the custodial account to another account in the child's interest that is more in line with your wishes for the child. For example, you can transfer the funds to a 529 savings account to help them save for college. A 529 plan is tax-advantaged and may positively affect the amount the student able to receive in financial aid as well.

Substituting Funds

Although the money in a UTMA belongs to the child, the custodian has the authority to spend it, using their reasonable judgment, for the benefit of the child.

Substitution is a strategy where you substitute the spending you would have done for the child out of another account with funds from the UTMA account. Spending for the child (as long as it's not everyday spending) can be drawn on this account.

It's important to keep records of the expenditures in case you need to prove later that they were indeed for the benefit of the child.

Every time you write a check against the UTMA funds that you would normally have paid out of your own account, write a check in the same amount to a more flexible trust fund—or another instrument such as an annuity, Family Limited Partnership (FLP), or 529 plan—that's been set up with the provisions you desire. For example, you could require that the child maintain a certain GPA, use the funds toward education expenses only, or not have access until their 30th birthday.

You may consider hiring an attorney, tax adviser, or other professional to make sure you're setting up these funds properly way so you're not surprised by tax implications or other restrictions down the road.

Create a projection of your child-related expenses and plan how many years it will take to draw down the balance of the UTMA while building up the balance of the new fund.

Providing Incentives to Your Adult Child

If your child has reached the age of majority, they have rightful ownership of the assets. You cannot confiscate or otherwise block them from using the funds, but you could use the power of incentive.

If you have a considerable estate or plan on continuing making gifts to the child, you can ask them to sign over their UTMA assets to a restricted holding such as the FLP or annuity, with the caveat that if they don't, they won't receive any additional money from your larger estate.

Under the terms of the UTMA, the account's money belongs solely to your child. If you decide to withhold the money from your child, perhaps spending it on your own needs or trying to conceal it, the child may decide to sue you once they come of age.

Confiscating the funds would be effectively taking them illegally from your child. Although you may have the best intentions, you expose yourself to a degree of risk.

If the child can make a reasonable claim in court that you have breached your duty by restricting him or her from the assets they owned, you could be in for a legal battle with no guarantee of winning.

Letting Go

Finally, it might make sense to just let go and trust your child with the money, letting the chips fall where they may. Your child might spend the money responsibly after all, and come back to you years later to tell you how much it meant for you to put your trust in them.

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