UTMA Account Is Treated Like a Trust Account

JUNE 11, 2012 VOLUME 19 NUMBER 23
The Uniform Transfers to Minors Act is almost universally known by its initials: UTMA. A version of the Act has been adopted in nearly every US state, and the few which have not adopted it have its similar predecessor, the Uniform Gifts to Minors Act (known, unsurprisingly, as UGMA).

The UTMA is intended to make it easy to put money aside for minors. It allows someone to create a sort of trust arrangement, just by including those magic initials in the title to a bank or brokerage account — or, in fact, on any property. The account title identifies the minor beneficiary, the custodian who manages the property, and the fact that it is a UTMA account. It’s simple: just title the bank account as “Jane Doe, custodian pursuant to the Arizona UTMA for benefit of Johnny Doe.” It’s not even essential that precisely those words be used (obviously, you wouldn’t want to use them unless you were trying to give money to a child named Johnny Doe).

That is the easy part. Then come a lot of questions. Such as:

• Who owns the money in a UTMA account?
• Whose Social Security number should go on the account?
• How can the money be invested? What can it be spent for?
• What accounting requirements are involved?
• Does the money have to be turned over to the child when he or she becomes an adult?
• What standards apply to the handling of the money?
• Can anyone else demand money from the account, or information about it?
• Are there limits on how much money can go into a UTMA account? Are there limits on what kind of money can go into the account?

Once set up, the UTMA account belongs to the minor. The custodian has the ability to manage it, but does not own the money and can not use it for his or her own benefit. It should be treated like a trust for the benefit of the minor. The minor’s Social Security number should be provided to the bank or financial institution, and the minor will need to file tax returns if the income is high enough to require returns. When the minor reaches a set age (in most states and most cases, the age is either 18 or 21 — check with a qualified attorney about your state and circumstance) the custodian must turn over the funds. The minor — and the minor’s parents or other close family members — have the right to demand account information, and the custodian has an obligation to provide that information.

Those are the basic rules, but of course specific answers will depend on the details of each question. But a recent North Carolina case gives some guidance to help analyze UTMA accounts — and it provides a cautionary tale about the use and misuse of UTMA funds.

In 1996, when shares in the family business were sold, Elwood Blake (not his real name) set aside a portion of the sale proceeds for the benefit of his granddaughter, then three years old. He named his son Richard Blake as custodian of the funds, pursuant to the North Carolina version of the UTMA.

Five years later Richard Blake and his wife Elaine separated, and a bitter and protracted legal struggle ensued over property division, custody of their children and, eventually, administration of the UTMA account for the benefit of their daughter. Elaine Blake demanded an accounting from her ex-husband and ended up filing a court proceeding to secure it.

After a court battle the judge hearing the case decided that Richard Blake had mishandled his daughters funds in a number of ways. He had been unreasonable in his refusal to provide accounting information. He had made speculative investments (including putting more than $50,000 into a venture capital fund). He had used his daughter’s funds to pay her medical and dental bills, when he should have been responsible for them himself. And he had used $5,000 of his daughter’s money to make a contribution — in his own name — to a local Republican Party cause.

The judge ordered Richard Blake to return $73,269.80 to his daughter’s UTMA account. It also ordered him to repay another $58,944.24 in lost investment earnings occasioned when he misused his daughter’s money. Then it ordered him to pay his ex-wife’s legal bills for having to bring the action — her legal fees totaled another $138,531.85. Finally, it removed him as custodian from all the UTMA accounts, finding that his mishandling precluded him from being in charge of the remaining funds or the money he must put back.

The North Carolina Court of Appeals reviewed the trial judge’s rulings, and found nothing wrong. There was plenty of evidence to support the judge, the appellate court ruled, and Mr. Blake should have treated his daughter’s UTMA account like a trust. When he did not, he became liable for the misused funds, the lost interest and the legal fees incurred in protecting his daughter’s interest. Belk v. Belk, June 5, 2012.

An interesting side note: “Richard Blake” already had a checkered history with the law. A lawyer and prominent businessman, he had won a seat as a local judge after criticizing his predecessor — the judge who handled a part of his divorce proceeding. When he refused to step down from his position on the Board of Directors of an auto-parts company the North Carolina Supreme Court removed him from his judicial office and banned him from serving in any future judicial position.