When you, as a parent, grandparent, other family member, or a friend of the family, want to give a child a head start financially, you can use a number of tools, including custodial accounts. The Uniform Transfers to Minors Act (UTMA) model law provides that these accounts can hold cash, securities, property, and other assets that are gifted to the minor. Although the child is the legal owner of the assets in the account, they can't access them until they reach a certain age, often 21. The age depends on the guidelines in the UTMA law passed by the state in which they reside.
If you later have second thoughts after putting money into and maybe even having set up the account, you can't cancel or reverse the UTMA or take your money back. Still, there are certain things you can do to change the nature of your gift and the way the child can access it when they reach the legal age. In some states, you may also be able to delay the age at which the minor can access the money.
- UTMA stands for Uniform Transfers to Minors Act, a model law crafted by the Uniform Law Commission that was designed to enable people to gift assets on behalf of a minor child, often for college costs.
- The age at which the minor gains access to the funds depends on individual state UTMA laws.
- Assets you have transferred into a UTMA are irrevocable gifts; you can't change your mind and take them back.
- If you don't think the recipient will be mature enough to use the UTMA account money wisely, you may want to consult with a financial professional or a lawyer about transferring the UTMA into another type of account. You can move assets from a UTMA as long as the new account also benefits the recipient.
What Is a UTMA Account?
In 1986, the Uniform Law Commission wrote a model law that could be enacted by states to govern how people could gift assets into an account to be used for the benefit of a minor child, typically for school expenses. Since then, every state but South Carolina has created its own version of the UTMA.
Gifts made to UTMA accounts are irrevocable, so you can't change your mind and take them back. The custodian of the account, who may be the same person who created it or another adult relative, is required to manage it in the minor's interest.
In most states, the minor automatically receives full control of the account when they reach their state's age of majority. In the meantime, the custodian can spend money from the account in ways that benefit the minor.
Some states let the creator of the account set the age of majority for the recipient. This age must be within a range from 18 to 21, from 21 to 25, or, in the case of Wyoming, from 21 to 30. In a few states, the age must be set at 18, 21, or 25, or at 21 or 25.
UTMA laws replaced the earlier Uniform Gift to Minors Act laws, which limited gifted assets to cash and securities.
Sometimes, you might find out that the restrictions on a UTMA account aren't what you thought when you opened the account and gave stocks, bonds, mutual funds, real estate, or other assets to a child within the account. Maybe you didn't clearly understand the rules regarding UTMA accounts. Or maybe as the recipient approaches legal age, you realize the child isn't mature enough to manage the assets.
Or, your family may have had a financial hardship or you now have other children with whom you would like to split the UTMA assets. Perhaps you found out that a student is entitled to less financial aid for college due to the UTMA account, which must be declared as an asset of your child on their federal financial aid forms.
The custodian of the UTMA account is not required to declare it on their financial aid form.
In any case, you may be surprised to find out you can't simply withdraw the cash or sell the assets. Still, if you are looking for flexibility with an existing UTMA account, there are a few options.
Transferring a Custodial Account to a 529
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 that the student is able to receive in financial aid as well.
A 529 account may be owned by the family member who contributes the money to the account, not by the minor.
If you go this route, you should realize the funds may only be used for school expenses. And you may not change the recipient of the 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. If you are the custodian of the account, you can adopt a substitution strategy under which you swap the spending you would have done for the child out of another account for funds drawn from the UTMA account. You are allowed to do that provided the money is not spent on everyday expenses, and the spending is beneficial for the minor.
It's important to keep records of your 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 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 has been set up with the new provisions you want. For example, you could require that the child maintain a certain grade point average, use the funds toward school expenses only, or not have access until their 30th birthday.
You may consider hiring an attorney, tax advisor, or other professional to make sure you're setting up these funds properly so that you're not surprised by tax or other issues down the road.
You should forecast 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.
Extending the Age of Majority
Some states allow the custodian of a UTMA account to extend the age at which the minor child is entitled to receive the assets. The minor may have the right to reject the extension, though, after they are informed of your intent.
You should consult an attorney who knows the UTMA law for the state in which the account was set up. Not all states permit age extensions.
Providing Incentives to Your Adult Child
If your child has reached the age of majority, they have rightful ownership of the assets. You cannot take away or block them from using the funds. Yet, you could use the power of incentive to encourage them to spend the money in a certain way or to hold off on spending it.
If you have a large estate or expect to continue to make gifts to the child, you can ask them to sign over their UTMA assets to a restricted holding such as an FLP or an annuity or to spend the money as you direct them to, with the promise of receiving more money from you later.
If you decide to withhold the UTMA money from your child, perhaps spending it on your own needs or trying to conceal it, your child or their custodian may sue you.
You might also tell the child that if they spend the money in a way you don't approve of, you will not give them any more money in the future.
On the other hand, it might make sense to 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 then come back to you years later to tell you how much it meant for you to put your trust in them.
The Balance does not provide tax, investment, or financial services or advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.