Uniform Laws Update provides information on uniform and model state laws in development as they apply to property, trust, and estate matters. The editors of Probate & Property welcome information and suggestions from readers.
The Uniform Transfers to Minors Act (UTMA) provides a simple way to transfer property to a custodial account for the benefit of a minor. It has been adopted in all 50 states, the District of Columbia, and the US Virgin Islands.
The current version of the UTMA dates to 1983, when it was approved by the Uniform Law Commission (ULC) as an update to the predecessor Uniform Gifts to Minors Act. The ULC first approved the predecessor act in 1956, which was based on an earlier model act sponsored by the major stock exchange firms to allow gifts of stock to minor recipients. The UTMA expanded on these earlier acts by including more types of property and more methods of transferring the property.
Custodial property is created by titling it in the name of an adult, followed by words like “as custodian for (name of minor) under the (name of enacting state) Uniform Transfers to Minors Act.” UTMA § 9. Property held in this form must be used for the benefit of the minor beneficiary. When the minor reaches a certain age (usually age 21, with exceptions addressed below), the custodian must transfer any remaining property to the minor. UTMA § 20.
Uniform laws are reviewed periodically to determine whether the statutes are functioning as intended and whether courts have misconstrued the intended effect of any provision or attempted to fill gaps in the law. A ULC study committee is currently reviewing the UTMA and several non-uniform UTMA amendments that certain states have enacted over the past 40 years. The study committee will ultimately produce a report recommending whether the UTMA should be amended.
So far, the committee has identified the following issues that could be addressed by amending the UTMA:
Duration of Custodianship. Section 20 of the UTMA provides for the termination of custodianships at age 21 for property transferred to a minor as a gift, by the exercise of a power of appointment, or as directed in a will or trust. Custodianships funded with other transfers may terminate sooner. For example, the personal representative of a decedent’s intestate estate can set up a custodial account for a minor who inherits property through intestacy rather than ask the court to appoint a conservator. UTMA § 6. The custodianship option is more convenient and avoids administrative expenses. (The court must approve transfers of property with a value over a statutory maximum amount.) Recognizing this option as a substitute for conservatorship, however, the UTMA requires the custodianship to terminate at the age of majority, as a conservatorship would. In most states, the age of the legal majority is 18.
Several states have amended their UTMA statutes to allow for an extended duration of custodianships to age 25 and, in one state, age 30. Some states allow the transferor or custodian to extend the duration. Most of these states also included a temporary right for the minor beneficiary to compel distribution at age 21 to preserve federal tax benefits.
Portability. Some states have adopted provisions that permit a custodian to transfer property from a custodial account to a qualified minor’s trust, which could provide professional management and better integration with the transferor’s other financial objectives.
Some states allow transfers of custodial property to educational savings accounts under Internal Revenue Code Sections 529 and 529A, which were not yet available when the UTMA was last updated. Allowing these transfers gains certain tax advantages but also decreases flexibility by limiting the permitted uses of the funds.
Making UTMA accounts more portable would likely benefit some minor beneficiaries, but custodians must carefully consider their fiduciary obligations and any potential account restrictions before initiating a transfer. Amending the UTMA to create safe harbors for these types of transfers under certain conditions could help non-professional custodians exercise their oversight responsibilities better.
Successor Custodians. Section 18 of the UTMA provides rules for a transferor or a custodian to designate specific successor custodians. Some states have diverged from the uniform language in an apparent attempt to clarify the rules and assign priority when multiple parties designate a successor or when a party delegates the power. At least one case involving this issue has been litigated, indicating greater clarity could be beneficial.
Joint Custodians. The UTMA requires only one custodian and one minor per custodianship. A few states have altered this rule to allow for joint custodians, which are particularly useful when custodianships are established for the benefit of children with unmarried or divorced parents.
Taxation and Parental Support. Section 11 of the UTMA provides that transfers to a custodian are irrevocable, and the minor beneficiary is the legal owner of the property. This means that income from the property is ordinarily taxed at the minor’s rate. Section 14 permits the custodian to use custodial property for any purpose that the custodian considers advisable for the use and benefit of the minor but also states that the use of custodial property does not affect the obligation of any person to support the minor.
These two provisions can have tax implications when the custodian is also a parent with an obligation to support the minor under other laws. If the parent is using custodial property to satisfy the obligation of support, the IRS has taken the position that any income from the custodial property should be includable in the parent’s gross income rather than the minor’s. This issue can be contentious, especially when parents are divorced and one of them wishes to use UTMA funds for expenses such as the minor’s college tuition.
A body of case law has developed over the past forty years to address this issue, but the courts of different states have not always reached similar conclusions. Amendments could clarify the application of the law and give greater guidance to custodians who find themselves in this situation.
This is only a partial list of issues that the UTMA study committee is considering. At press time, the committee was seeking additional observers from institutions that administer UTMA accounts for assistance in identifying other issues with the UTMA and recommending potential solutions to clarify or improve the uniform act. Members of the ABA Section of Real Property, Trust and Estate Law with relevant expertise are encouraged to contribute their ideas.
The primary sources for this edition of Unifrom Laws Update were the research and memoranda of Emily S. Taylor Poppe, Professor at the University of California, Irvine School of Law and Reporter for the Study Committee on Amendments to the UTMA.