The Dangers of UTMA Accounts
The Uniform Transfers To Minors Act (UTMA) is a law that allows gifts to be made to a minor child without the necessity of hiring a lawyer to create a trust for the minor child (usually, a grandchild). Generally, the fund is used as a way to save for college tuition and other expenses. Grandparents often use this type of account to provide for grandchildren while also making gifts that satisfy IRS requirements for the $14,000 annual exclusion from gift taxes.
The account can easily be established at a bank or other financial institution. A custodian other than the donor (the person making the gift) is named to manage the funds until the child reaches adulthood. While the concept behind UTMA accounts is to have an easy way to save money for children for college, there are serious dangers with these accounts.
The biggest danger is that the money is considered the property of the minor. In Alabama, once the minor turns 19, the child can take control of the money as do whatever he or she pleases. There are no continued restrictions on how the money can be spent. While the grandparent may have intended the money to be used for college, the 19 year old grandchild may have other plans for the funds. Additionally, an UTMA account can also negatively impact the child’s ability to qualify for financial aid for college.
The donor cannot be the custodian of the funds for the minor child. This means that someone else must be trusted to control the money until the child reaches 19 years of age. The custodian is not required to spend the money in accordance with the wishes of the donor.
If the donor wants to be certain that the funds are spent in a certain manner or for a certain purpose (such as only using the money for college tuition or health expenses), the UTMA account cannot accomplish the donor’s goals once the child reach the age of 19. Instead, the donor needs to consider a trust which can be controlled for as long as desired, such as, until the child is 25 or 30; or, for the purposes desired.
The information provided is for general educational purposes and is not presented as legal advice. For professional advice regarding a specific issue, please contact Ms. Holliman’s office at Bradford & Holliman, LLC, for an appointment at 205-663-0281.