Using a UTMA Account as Part of Your Estate Plan

            A UTMA account is a financial account created to hold assets on behalf of a minor child.  UTMA accounts are established through banks, credit unions and other financial institutions and are governed by the Virginia Uniform Transfers to Minors Act.  When used properly, transfers to a UTMA account can be a useful part of an estate plan and a great way to transfer assets to benefit a minor.  However, there are several pitfalls and drawbacks to using a UTMA account that should be carefully considered.

            What is a UTMA account and how do I set one up?

            A UTMA account is like any standard checking, savings, or brokerage account, except the account is titled in the name of an adult custodian (usually a parent) on behalf of a minor beneficiary.  Typically, a UTMA is titled in the name of the adult “as custodian for [insert name of minor beneficiary] under the Virginia Uniform Transfer to Minors Act.”  This creates a fiduciary relationship between the custodian, who manages the assets, and the minor, who is entitled to enjoy the assets.  The custodian has access and control of the account but may only use the assets for the minor’s benefit.

            What are the benefits of creating a UTMA account?

            The primary benefit of creating a UTMA account is that it is a relatively easy, inexpensive way to transfer assets to a minor beneficiary.  Minors cannot own property in Virginia and most parents are reluctant to give large sums of money to a minor without any restrictions or supervision.  A UTMA account allows the transfer of money for the benefit of a minor under the care of a responsible custodian until the minor comes of age.  Prior to the enactment of the Virginia Uniform Transfer to Minors Act (and its predecessor the Uniform Gifts to Minors Act), a parent was limited to creating a trust or a guardianship for the minor, both of which can be prohibitively expensive for relatively small gifts.   

            What are the drawbacks of creating a UTMA account?

            Transferring assets to a UTMA account can be a beneficial part of an estate plan, but comes with several drawbacks, which should be carefully considered.

            First, a transfer to a UTMA account is irrevocable meaning the assets become the minor’s property as soon as the transfer is complete.  As a result, a custodian who subsequently has financial difficulties cannot unilaterally reverse the transfer without breaching his or her fiduciary duties to the minor.  In addition, because it is irrevocable, a transfer to a UTMA account may have gift, estate and income tax consequences. 

            Second, assets of a UTMA cannot be used to directly benefit the parent of a minor.  Many parents still consider the assets of a UTMA account “theirs” and use it for purposes that either directly or indirectly benefit themselves.  The Virginia Uniform Transfer to Minors Act clearly states that the money must be used solely for the benefit of the minor child.

            Third, assets of a UTMA account cannot be used by a parent as a substitute for his or her obligation to support the minor.  Parents similarly run into trouble by using the assets of a UTMA account to pay for things that fall under their general obligation to support, such as food, shelter, clothing.  A custodian of a UTMA should consult with an attorney before making large expenditures of UTMA assets. 

            Finally, by default a UTMA account terminates upon the minor’s eighteenth birthday, as of the minor’s twenty-first birthday, and as of the minor’s twenty-fifth birthday.  The age at which the UTMA account terminates depends upon the documentation signed at the financial institution when the account is opened.  Nevertheless, more families are desiring to delay their children’s inheritance until even later in life for various reasons, including more financial maturity, particularly when those accounts that started small became million-dollar accounts through growth and annual giving.

             Conclusion

            Creating a UTMA account for a minor beneficiary can be a very useful, efficient way to transfer assets to a minor.  However, like any important decision, there are pros and cons that should be considered before making such a transfer.  As always, it is best to consult with your accountant, financial advisor and attorney before making a decision to use a UTMA account as part of your estate plan.  If you have any further question about Virginia Uniform Transfers to Minors Act or about your estate plan, please give our attorneys a call at (804) 270-1300.