The Uniform Transfers to Minors Act (UTMA) is a popular choice for making gifts to minor children. A UTMA account is easy to set up, essentially free to administer, and does not involve lawyers, courts or even (usually) accountants. But UTMA accounts continue to be the source of confusion. Who actually owns a UTMA account? What rules govern its management? When does it end?
UTMA basics
Forty-nine states have adopted the Uniform Transfers to Minors Act. One, South Carolina, has the earlier Uniform Gifts to Minors Act (UGMA) instead. While there are state-to-state variations in the specifics, the basic idea remains consistent.
A UTMA account belongs to the minor beneficiary. The custodian operates as a sort of trustee, with a duty to hold the money for the benefit of the minor. When the minor reaches a certain age, he or she is entitled to receive the balance of the UTMA account. For most purposes, and in most states, that age is either 18 or 21.
Suppose that a mother decides to set up a UTMA account for her son. She puts her money into the account, names herself as custodian, and continues to manage the money. Can she close out the account and take the money back? No. It is no longer hers, even though she manages it. This leads to a lot of confusion about proper management of UTMA accounts.
We have written about the kinds of problems encountered with UTMA accounts several times. Those problems can include failure to turn the money over to the beneficiary, or failure to account properly. A recent case in bankruptcy court raised another variation that illustrates the nature of UTMA accounts.
The UTMA account is established
In 1998, when Nebraska resident Marcus Soori-Arachi was 15, his father established a UTMA account for his benefit. The father put about $10,000 into the account, and purchased a “variable and fixed annuity” with the balance. The father named himself as custodian.
Under Nebraska’s version of the UTMA, the account should have terminated when Mr. Soori reached age 19 (the Arizona version would have set the age at 21). Nothing changed when Mr. Soori’s 19th birthday arrived; in fact, nothing changed for another decade.
In 2017, Mr. Soori (now a resident of Rhode Island) and his wife filed for bankruptcy under Chapter 7. The bankruptcy trustee began the process of finding and liquidating all of Mr. Soori’s assets.
Bankruptcy trustee changes the UTMA account
The bankruptcy trustee contacted several different financial institutions. One was Fidelity Investment Life Insurance, where the UTMA account was held. Based on that contact, Fidelity updated its records to show that the owner of the account was no longer Mr. Soori’s father, but Mr. Soori himself.
Fidelity also notified the bankruptcy trustee that the account had grown to $105,000 in value. The account included a death benefit, which named Mr. Soori’s estate as beneficiary.
Meanwhile, at the bankruptcy trustee’s request, Fidelity changed the account title from the UTMA account to Mr. Soori’s name individually. Now Mr. Soori was the owner and annuitant, and his estate was the beneficiary of the account.
Based on that information, the bankruptcy trustee asserted that Mr. Soori’s annuity was an asset of his bankruptcy estate, and that it should be delivered to the trustee. Mr. Soori objected, insisting that the annuity belonged to his UTMA account.
The bankruptcy court ruling
Mr. Soori actually made two significant arguments. In one, he insisted that the UTMA account owned the annuity. Fidelity, he argued, should not have changed its ownership based on the bankruptcy trustee’s instructions. Besides, he insisted, the annuity included a death benefit, and therefore was like a life insurance contract. Especially since it was issued by a life insurance company, it should be subject to the special treatment accorded under Rhode Island law to life insurance owned by individuals who have filed for bankruptcy.
The bankruptcy judge rejected both arguments. With regard to the UTMA status, the judge ruled that Mr. Soori automatically became the owner of the account on his nineteenth birthday. Fidelity’s update of its records was just that — the annuity was no longer in an UTMA account.
The judge also made short work of Mr. Soori’s second argument. Despite the annuity being sold by a life insurance company, it was not life insurance. Even the death benefit did not change that. In re: Soori-Arachi and Tamgho, March 26, 2019.
What does Mr. Soori’s UTMA account teach us?
First of all, it’s important to note that Mr. Soori’s UTMA account was governed by Nebraska law and being interpreted in a Rhode Island bankruptcy court. Because state laws differ, things might be different in Arizona.
That said, it does help make clear one essential element of the Uniform Transfers to Minors Act. Property titled to an UTMA account belongs to the minor. An UTMA custodian is required to transfer the property to the former minor when they reach the relevant age (again, usually age 21 in Arizona, but age 19 under Nebraska law). In the meantime, the UTMA custodian has a duty to segregate the funds from their own, account for investments and expenditures, and generally behave like a trustee must behave.
Mr. Soori’s story also points out one of the biggest shortcomings of the UTMA account. If his father had paid to establish a trust for Mr. Soori’s benefit, he could have picked a different age for distributions. In fact, he could have held the annuity in trust indefinitely. If he had done that, the $105,000 account would not have been subjected to Mr. Soori’s later bankruptcy proceeding.
There’s not a shred of evidence to suggest that Mr. Soori and his wife are anything but happily married. But a trust established with his father’s gift would have protected against a future divorce, or a personal injury claim, as well. A small payment to a lawyer at the beginning of the process would have yielded a very large return on Mr. Soori’s father’s gift, as things turned out.
