The Uniform Transfers to Minor Act (UTMA) laws replaced the Uniform Gifts to Minors Act (UGMA) in all states except Vermont and South Carolina. The laws were changed to allow parents, grandparents and legal guardians to transfer ownership of physical property (e.g., real estate) to children under the age of 18 while the adult was listed as the custodian of the property. UGMA accounts were only allowed to be used to hold assets such as stocks, bonds and cash making them more restrictive than the UTMA accounts. In spite of their popularity, there are serious advantages and disadvantages to Uniform Transfers to Minors Act (UTMA) accounts.
Advantages & disadvantages regarding control of assets
One of the primary advantages of UTMA accounts is that the custodian (e.g. the person making the gift) is in control of the asset until such time as the minor reaches the age of distribution. In most states, this means that control is maintained until the child is 18 although in some states, the age may be as high as 25.
In spite of this, there is a significant disadvantage to UTMA accounts when compared to other investment vehicles such as 529 (College Savings) plans. Once the minor reaches the age of distribution as set forth under the Uniform Transfers to Minors Act, the custodian no longer has any say as to how the assets are used by the minor.
UTMA account setup and transfer
One of the major advantages of an UTMA account is that unlike Trusts or other legal methods of transfers to minors, the cost to set up and maintain accounts is generally very low if there is any cost involved. Setting up a trust account can be costly while an UTMA is merely a designation of a custodian.
While the cost is an advantage, the disadvantage that most people are not aware of is that once the assets are placed into an UTMA account, the assets are legally owned by the minor. This legality means that the custodian agrees that any assets that are liquidated are used for the benefit of the minor.
Custodians and UTMA rules
While a trust or other financial vehicle may allow both parents to serve as trustees or custodians, an UTMA account allows for only one custodian. A single UTMA account may receive assets from more than one adult, but only one would be allowed to serve as custodian. Unfortunately, the disadvantage to this is that in the event of death of a custodian, there are several legal steps to undertake to have the custodian changed.
When minors reach age of distribution
The custodian has full control over all funds during the time that the account owner (the minor) is below the age of distribution. This means that they may liquidate the account and transfer it to a college savings account or they may allow the assets to grow until the minor reaches the age of distribution.
However, distributions are not without problems. Once the minor reaches the age of distribution, they are free to do anything they please with the funds or assets that are held in a Uniform Transfers to Minors Act account. This is seen by most custodians as a disadvantage simply because of the potential for a child to be irresponsible with money. However, there is nothing that can be done to prevent this from occurring once the minor is of age.
There are numerous advantages and disadvantage to having accounts that are set up under the Uniform Transfers to Minors Act. For those who wish to make a distribution to a minor, there may be other options that help protect the assets from an irresponsible high school or college student. For those considering making a gift to a minor for their college education, it is a good idea to talk to a financial advisor and explore all available options.