Transferring Assets to a Minor: UTMA or Trust?

The Uniform Transfers to Minors Act (UTMA) is a model law created by legal scholars that permits you to name a custodian to manage property that you leave to a minor. Almost every state in the United States has adopted some form of the UTMA.

Under the UTMA, property can be left to a minor through the creation of a UTMA account either during your lifetime or upon your death as a part of your will. If you choose to pass property to a minor through the UTMA, special language must be included in your will or other document specifically stating that the property is being transferred according to the Uniform Transfers to Minors Act in your state.

A UTMA account can hold all kinds of property, including stocks, real estate, cash, bonds, life insurance policies or proceeds and more. The property belongs to the minor from the time the property is gifted, but minors cannot legally hold certain kinds of property or enter into certain types of transactions on their own. A UTMA account allows the asset to be held in the child’s name, but any transactions to be carried out in relation to that asset are to be carried out by a custodian. 

The custodian is a fiduciary responsible for managing the property for the benefit of the minor until the minor reaches the identified age. The custodian is permitted to spend or invest the money or other assets in the UTMA account at their discretion, but it must be for the sole benefit of the child. For example, the custodian could use funds in a UTMA account to pay for a child’s education, transportation, or for activities such as sports or music lessons. When a UTMA is created through a will, sometimes the grantor specifies which expenses the account can be used for.

The custodian can be the giver (you) or someone you designate to be the custodian. The custodian of the property under the UTMA need not be the same person you name to be the minor’s personal custodian, but if not, it is a good idea to choose a custodian under the UTMA who will be able to work well with and lives near the child’s personal custodian. It is also a good practice to name an alternate custodian in the event that your first choice is unable to serve. If no alternate is named, the court will choose the custodian of the property for the child.

Depending on the state, the custodianship continues until the minor attains a specific age, which may or may not be the same as the age of legal adulthood. For example, in New York, one becomes a legal adult at 18, but the age of legal adulthood for custodial accounts is 21. Some states allow the grantor to extend the length of the custodianship until the child reaches a later age. For example, Florida and California permit you to elect to extend the UTMA custodianship until age 25.

At the end of the custodianship period, the child automatically receives the remainder of the account. If you prefer to have more control over how or when the beneficiary receives the assets, a UTMA account may not be the best option to transfer the assets. In addition, if the UTMA account is established during your lifetime and you are the custodian, if you die before the child reaches the age of majority, the value of the property in the UTMA account will be included in your estate, even though the property technically belongs to the child, and there may be other tax implications or adverse impacts on the child’s eligibility for college financial aid when using a UTMA account.

A UTMA account can be a simple, low cost, easily administered means to transfer property to a minor, but it isn’t always the right solution. In some cases, a trust might be a better option, particularly if there is a concern that the child may receive more money when the custodianship period ends than the child is competent to manage, or if the asset is one that requires sophisticated management.

When a trust is established, you will also name someone (a trustee) to manage the trust on the child’s behalf, and you can decide at what age the proceeds from the trust will be turned over to the child. Any assets within the trust will be protected. The trustee must keep the beneficiary informed, manage trust assets wisely and in accordance with state law, and file a separate tax return for the trust each year.

You can learn more about trusts here, and if you have questions about the best way to transfer assets to your minor child, post your legal question anonymously on our website. We’ll send your question to all relevant lawyers in our network, and you’ll receive a notification of responses via email for free.