What Happens If I Want To Cancel a UTMA?
You Can't Unring a Bell and You Can't Get Out of a UTMA
In the investing world, it isn't hard to stumble across families that have discovered, years after the fact, that a UTMA account was not what they intended when they made a gift to a minor child. Often, this happens when parents, friends, godparents, uncles, aunts, grandfathers, grandmothers, and others who have given stocks, bonds, mutual funds, real estate, private businesses, money market funds, certificates of deposit, checking accounts, or other financial assets to a child under the Uniform Transfer to Minors Act discover that upon reaching the age of maturity (set by default at 21 years old in most states), they have raised either a spendthrift, a drifter, a drug addict, or some other personality type that will lead to the capital, so carefully accumulated over the years, being squandered; not the vision the generous donors had when they wanted to help little Susie or Billy pay for college, buy a first home, or start their own company.
Perhaps more commonly, the child insists they will not attend trade school or college and plan on blowing the money on some half-wit scheme.
What options are available if you find yourself in this position? Unfortunately, not many. Depending on the age of the child, there many not be any at all. Let's look at a few scenarios.
1. Your Child Is Still Below the Age of the UTMA Custodianship Dissolution and You Are Still Acting Custodian
In this case, you have an opportunity to engage in what some experts have called "substitution". The money in a UTMA belongs the child, of that there is no doubt. However, the custodian has the authority to spend it on the benefit of the child using his or her reasonable judgment. If your kid is 16 years old, you have plenty of time to start spending the UTMA money on the expenditures you would normally cover out of pocket - stuff like piano lessons, school trips, or cosmetic improvements such as braces.
Meanwhile, every time you write a check that you would have normally paid (before you started tapping the UTMA funds), go ahead and write a personal check to a much more flexible trust fund that has the provisions you desire; maintaining a certain GPA, going only toward education expenses, or not being accessible until their 30th birthday, being common.
Over time, it shouldn't be too hard to drain down the balance of the UTMA while building up the balance of the new trust or, if you prefer, 529 college savings plan. For some families, this can be impossible. The New York Times once had an article about a small business owner who had gifted shares of a startup to a young son. By the time the son was an adult, those shares, transferred under UTMA, were worth $5,000,000 and there was nothing the family could do to prevent the kid from taking the wealth.
2. Your Child Has Reached the Age At Which They Are Entitled to Take Possession of the Assets That Had Been Held Under UTMA
This is where the news gets is bad. If you decide to withhold the money from your child, perhaps spending it on yourself or hiding it, and they decide to sue you, you're up a proverbial creek. The money that was held under the UTMA provisions belongs solely to your child. It consists of irrevocable gifts. From a logistical standpoint, what you did was no different than reaching into someone's purse and lifting their cash or grabbing money out of a cash register when the clerk isn't looking. It's illegal. It's immoral. You're a thief. While it may have been done with the best intentions (most parents do it for the sake of protecting their child), it doesn't matter.
You embezzled the money. In most cases, it never turns into a criminal matter, nor does the child bother to pursue civil claims, but if the relationship goes south, you're exposing yourself to a lot of risk.
That means you are going to have to get creative and probably employ a decent attorney. For example, some parents are fond of using family limited partnerships. The custodian takes the UTMA money and buys limited partnership units that they (the parents) control via liquidity restrictions in the operating agreement. Others opt for things such as equity indexed variable annuity contracts. If the child can make a reasonable claim in court, though, that this was a breach of your duty by restricting him or her from the assets they owned, you could be in for a long, perhaps bitter, fight.
You very well might lose.
Another option is to use the super power of incentive. If you have a considerable estate, or plan on continuing making gifts to the child, you can convince them to sign over their assets to one of these restricted holdings or else they won't ever see another penny. My own attorney has stories about this as it is done fairly often. Mom and Dad schedule a meeting in the big conference room and say, "You know, son, we realize you are now entitled to touch this nice pile of money we set aside for you. But if you don't put it into this real estate partnership over here, this much bigger pile that will someday be yours ... well, you won't ever see a cent of it." And in almost every single case, the now-adult child signs on the dotted line.