Oftentimes, well-meaning parents or grandparents set up a custodial account
for their child under the Uniform Transfers to Minors Act (UTMA), but
later realize they should not have done so. What then? This article will
discuss why you may regret setting up a UTMA for your child. The next
article will discuss ways to dismantle the account.
What Is a UTMA?
In a nutshell, a UTMA is a custodial account that legally belongs to the
child, but is being overseen by a custodian (usually a parent) until the
child comes of legal age and can take over the account himself or herself.
In California, the legal age is 18, but may be 21 in other states. The
custodian of the account may only use the money in the account “for
the use and benefit of the minor,” which is quite broad, but certainly
does not allow for withdrawals because a parent regrets putting in the
money and wants to use it for other things.
Why You Might Want to Undo a UTMA
UTMAs are easy to set up. Many brokerages and banks will gladly set up
an account without fully disclosing all the pros and cons of using this type of
estate planning vehicle. People often think UTMAs are cheap and easy alternatives to setting
up a child’s
trust (which requires professional attorney services) and thus go down the UTMA
road without realizing all the issues that might arise.
Here are some common problems with UTMAs that make parents regret creating
one for their child:
Your teenager is a teenager. Many parents who set up the account when their child is still young think
that it would be a good way to provide their kids with financial aid for
college. Unfortunately, until their child is on the cusp of taking over
the entire large sum, they may not realizethat their 18-year-old is not
mature enough to handle all of that money wisely. Perhaps their child,
like any normal teenager, differs in her view of how that money should
be spent (e.g. on trips abroad instead of tuition bills).
Hurting financial aid options. On the other end of the spectrum, parents may regret setting up the UTMA
because it actually significantly restricts their child’s eligibility
for financial aid. The account is seen as the child’s asset and
thus most financial aid formulas impose a penalty for those funds.
They need the money back. Sometimes parents put in a large amount of money in a child’s UTMA
and then realize at a later point that the money can be better spent elsewhere.
Perhaps they suddenly hit an unexpected patch of unemployment or illness,
or they need the money for a down payment on the perfect family home.
All these reasons are common and underscore how important it is to discuss
estate planning with an attorney before setting anything up. Something
that may seem like a cheap and easy option can turn into a tremendous
hassle if it doesn’t suit your particular family situation. If you
would like to discuss the right estate planning option for you, or how
to fix a UTMA mistake,
contact Hannah Sargent, Alameda County probate and estate planning attorney today for a
Surprise siblings. It may be the case that a parent set up a UTMA for a child thinking that
they were done growing their family, and then later on unexpectedly had
another child or adopted. If the parents are not wealthy enough to set
up comparable UTMAs for their newer additions, they may regret giving
so much to the first child and sowing possible seeds of discord among