Raise your hand if you’ve created an UTMA “custodial account” for your minor child?
(UTMA, by the way, stands for the Uniform Transfer to Minors Act under Massachusetts General Laws Chapter 201A).
I know that many of you have because I see it all the time in my Family Legal Planning practice. And, the question that always comes up is “when” can my child get the money in that custodial account?Well, the answer generally is when he/she turns 21.
Yes, you heard me correctly – age 21!
Now, that’s not all that bad if the account only has a few thousand dollars in it because you’ve been putting away a few dollars here and there from birthdays and holidays. But, it becomes terribly bad if you’ve been putting away tens of thousands of dollars in an investment account because that child can have complete and total access to that money when they turn 21 and you can’t say a darn thing about it.
You see, UTMAs were created as a simple way of holding money or other investments for a minor child because minor children can’t own assets or investments before they turn 18 in Massachusetts. And UTMAs allow parents or grandparents to become the custodian of these investments without having to go to an attorney to draft up a more formal written trust agreement for the child. You can go to the bank or call your financial planner and easily set up an UTMA account just by making a deposit or placing money in a mutual fund. Just fill out a quick application, sign a few forms and you can start investing for your child’s future right away – no lawyer, no legal fees, no trust agreement. Sounds great.
The trouble with this, though, is that every time you put money in that UTMA account, you are making an irrevocable gift to that child. You may be the custodian, but you are transferring assets that belong to your child – the income growth of that UTMA account is even taxed at the child’s tax rate. However, since the funds in an UTMA account belong to that child, when that child turns 21 they can have unfettered access to that entire account without anymore oversight by you.
If that account contains $40,000, $50,000 or even more, that may not be the result you ever wanted or intended. I don’t know about other parents, but I wouldn’t want my 21 year old daughter having uncontrolled access to thousands and thousands of dollars (no offense to my daughter, of course).
A far better alternative to an UTMA account is a living trust that you create for the benefit of your minor child. By establishing the living trust, you can create far more control over distributions so that you can protect your child’s investments long into their future. I often recommend setting guaranteed distribution ages very high (for example, in one case the age for a guaranteed distribution to the child is 50 years old), while at the same time leaving the parent or trustee with the power to make discretionary distributions for the care and maintenance of the child.
For a complimentary Family Legal Planning session with Andrew Garcia to discuss UTMAs or a living trust for your minor child, just call (508) 998-0800 or email him at [email protected]