Dear Mr. Premack: The banks aren’t paying any interest these days, and our children are having difficulty staying afloat, let alone saving for the grandchildren’s’ college. We are comfortable financially, and would like to set some money aside as a college fund. If we simply make gifts into a UTMA account, how would it function as the years pass? – W.G.
A “UTMA” account is a custodial account set up under the Texas Uniform Transfers to Minors Act, part of the Texas Property Code. UTMA was once known as “UGMA” (Uniform Gifts to Minors Act). The updated law is more inclusive than the prior law, and also extended the allowable length of the custodianship.
Generally, a UTMA custodial account is created when someone (often, like you, the grandparent) decides to make a gift to benefit a minor child. UTMA accounts can also be used to receive an inheritance aimed at a minor child. The child cannot legally own the assets, so a responsible adult is made custodian under the UTMA. Even so, the income earned by the UTMA account is reported on the minor’s income tax return, not on the adult custodian’s return.
The assets which you place into the custodial account may either be retained in the form they were received (cash, stock, bonds) or may be reinvested by the custodian in a prudent manner. There are some statutory restrictions on the custodian’s purchase of life insurance, and the custodian is legally required to keep the custodian assets separate from any other person’s funds.
The custodian also has the legal power to expend the funds for the benefit of the minor. The Texas Property Code Texas allows the custodian to disburse funds directly to the minor or to disburse funds for the minor’s benefit (by paying the minor’s expenses directly to a service provider, like paying college tuition). The Property Code says the custodian may disburse funds in any manner the “custodian considers advisable for the use and benefit of the minor.”
The custodian need not consider whether or not the minor has other money available to pay for the current need. The custodian need not seek a court order before disbursing funds. And although the minor’s parents still may have a duty to support the minor, the custodian need not place their support before making disbursements from the account. It is legally acceptable for the custodian to spend the funds for food, clothing, shelter and medical care of the minor, even if the parents are also legally obligated to provide for those needs.
Perhaps the most negative of feature of a UTMA account is that it must end when the minor reaches age 21. Remaining funds must be put into the minor’s control even though the 21 year old may not yet have mature judgment. If this required termination at age 21 steers you away from using a UTMA account, the alternatives include using a 529 plan or establishing a trust to hold the funds. IN a trust, the funds can be reserved until the beneficiary is 25, or 30, or whatever mature age you select. The trust would include explicit instructions to the Trustee, which can include waiting to make final distribution of the funds until the beneficiary is 25, or 30, or whatever mature age you select. Talk with an experienced Elder Law Attorney and your accountant to decide which option is best for you.
Paul Premack is a Certified Elder Law Attorney and a Five Star Wealth Manager (Texas Monthly Magazine 2009-2013) practicing estate planning and probate law in San Antonio. Submit estate planning, probate and elder law questions by clicking “submit a question” at www.premack.com, or go there to view the archive of his past legal columns.