Child’s UTMA is Ending – What Protection Exists?

August 13, 2019

Uniform Transfers to Minors Act, or UTMA, accounts are a popular way to hold investments and bank accounts for minors.  Such accounts are owned by the minor but controlled by a designated adult custodian.  The minor becomes the outright owner of the account assets when he or she reaches the age of majority specified in a state’s UTMA statute.  For example, in Illinois minors may receive account assets in most cases at age 21.

UTMA accounts are especially attractive because the income earned is taxed to the minor, but the assets are under the control of the custodian.  The problem most parents experience is the apprehension to give significant assets to a very young adult.  Not all twenty-one-year-olds are experienced enough to make good financial decisions with newfound wealth.  Often, UTMA accounts accumulate significant wealth over time and a minor receiving such outright, subjects that wealth to creditor and divorce claims.

So, what options are available to protect assets that will soon be available to a child dreaming of buying a new Porsche?  Strategies available to the custodian vary from state-to-state.  Parents often wonder if they can “put the account back into their name,” since they were the ones that contributed to the account.  Taking the assets back are not advisable for many tax and legal ownership reasons.  Below, are some of the strategies available to exert more control over assets in UTMA accounts that are about to become available to a young adult.

Transfer in Trust

The “Uniform Transfers to Minors Act” body of law adopted by many states provides that, prior to the minor reaching age of majority, a custodian may transfer UTMA assets to a “Qualified Minors Trust.”  That means a new trust is formed and the custodian transfers assets into the new entity without a court order.  The trustee will hold onto and govern the use of assets according to the distribution standard set forth in the trust agreement.  UTMA statutes provide what type of trust may be formed.

Contribute to a Limited Liability Company

UTMA law provides that a custodian may “invest the custodial property.” Therefore, he or she may contribute custodial property to a limited liability company (LLC) or similar entity in exchange for an LLC ownership interest.  The LLC manager has control over investment and distribution of LLC property, which may consist of securities or other investment normally made in UTMA accounts.

529 Plans

The custodian may invest UTMA funds in qualified tuition programs commonly known as “529 plans.”  Such plans are under the control of a designated person and, as such, the funds are put beyond the reach of the child who is about to reach majority.

Where a UTMA account owner has already reached the age of majority, fewer options exist to exert more protection on account assets.  A new asset protection trust could be formed, but that requires the account owner’s approval.

An UTMA account is a great tax planning tool.  Protecting UTMA assets after the child reaches majority requires thoughtful planning well ahead of the time the child reaches majority!

Michael C. Foltz, JD, CPA, CFP® is a BDF founding principal and founder of our Business Owner Team with an extensive background in law, tax and estate planning.  Mike shares his estate planning expertise by following the ever-changing federal and state estate tax laws and preparing education summaries for clients and team members.  Recognized by Chicago magazine as a Five Star Wealth Manager, Mike has given numerous presentations on estate planning to BDF clients and professional organizations such as the Exit Planning Institute and Illinois State Bar Association. Publications such as Inc. magazine and the Wall Street Journal have featured his insights into estate planning, and he has contributed to an estate-planning publication for Commerce Clearing House.