The Problem With UGMA UTMA Account

The Problem With UGMA UTMA Account is when parents try to take it back, its FRAUD.

Imagine you open a savings account for your child at the local bank, depositing $10,000 in the hope that they will someday use it to pay for college. You put their name on the account and name yourself as the custodian. Every single financial institution that permits this sort of setup structures the title as a "UTMA account." The next week, you get hit with an enormous medical bill that threatens your solvency—you might have to declare bankruptcy unless you can work something out. In a panic, you go back to the bank, withdraw the $10,000 you put in your child's account and figure you'll replace it later.

Or how about this scenario: Your mother passes away and leaves your five-year-old daughter (her granddaughter) $150,000. She names you as successor custodian to a brokerage account she established, stuffed with blue-chip stocks like Coca-Cola, Colgate-Palmolive, Johnson & Johnson, Hershey, and Procter & Gamble. When your daughter is 13 years old, she breaks her leg in a sporting accident at a time when you are unemployed and have no health insurance. You decide to withdraw a few thousand dollars to pay her medical bills out of her account.

Here's one last hypothetical: your brother decides to give your son (his nephew) a check for $1,000 each Christmas to help pay for college. The check is made out to "[Your name] as custodian for [nephew's name]." You deposit the money in your checking account and make a rough back-of-the-envelope calculation, so you have a decent idea of what should be available for your son. Over the years, your brother gives you a total of $18,000. When your kid reaches adulthood, he asks for his money. You have $7,000 in your checking account and tell him, "We used it on the family over the years, but here's what I can give you right now." You write a smaller check.

Each of these scenarios broke the law in a significant, serious way. In the process, you've opened yourself up to everything ranging from criminal prosecution to civil lawsuits. Legal proceedings could result in the restitution of the funds you took, payment of foregone investment income that should have been generated, attorney fees, and a host of other expenses that can (and probably will) be more costly than the money you used. This may come as surprise to those who don't spend a lot of time considering financial law, but in the United States, a child's money does not belong to the child's parents or guardians.

The Reason Your Child's UTMA Assets Are Protected from You
Legally speaking, two things occurred the moment assets were gifted under the UTMA law. These occur whether or not the donor is fully aware of UTMA restrictions on withdrawals:

It became an immediately-vested, irrevocable gift. Neither you nor any other donor can withdraw money deposited into a UTMA back for any reason (this includes cases in which the child dies—the UTMA funds are part of their probate estate and need to be settled accordingly). The funds must be handed over to the child at the age of maturity. The age of maturity is determined at the time of the gifting, and it can be as high as age 25. If no age is pre-determined, then it defaults to either 18 or 21, depending on state law.1

Secondly, as the custodian of the account, you owe what is known as a fiduciary duty to your child. This means you can only use the money in their best interest. You must invest it in a manner consistent with the prudent man rule. You also can't use the funds for necessary expenses like food or shelter—you are legally obligated to provide those as a parent. As part of the fiduciary obligation, you are also required to keep detailed accounting records, down to the penny, of every cash flow into or out of the account. If the child requests accounting records, even decades after it was first established (as is often the case when babies or young children are gifted stock), you'll be compelled by the courts to produce it (if you don't do so voluntarily).

You would think these rules would be fairly straightforward. Yet parents continue to wrongly state, often with conviction, that they are perfectly within their rights to spend a child's money, undo a previous transfer, or somehow stop an irresponsible child from accessing UTMA principal. By cashing checks on behalf of a child, the parent agrees, knowingly or unknowingly, to take on the obligations and liabilities of custodianship. The donor or the child could easily come back and sue the parent if the parent mismanages those funds. Even without malicious intent, it's illegal to do anything with the money that the child doesn't ask for.

[Skullgetskull]

What lawyer should I get my dad closed the account and is holding money I heard him speak to my mom talking about offshore accounts what should I do how to sue for the money I know the account was made but here’s the thing the child doesn’t get to manage or see the account so I don’t know where to strike

[jguild]

How does the child ever become aware the custodian opened the account or withdrew any money?

[StochasticMCSG]

Upon age of majority / trust termination, can the custodian transfer funds to existing trusts where the custodian is the trustee and the minor is the beneficiary?

[MadisonHolt-sh]

Uncle closed my UTMA account and sent the funds to me but I’m unable to cash the check? He won’t help in regards now as he has completed his duty as “custodian” … is there anything I can do?

[conradvreelandyoko]

My dad never put mine in an account? And kept all my dividends, Iam 38 and still trying to get at these accounts that were floating outside of an investment account

[kimhowell]

My grandkids are in Fostercare not because they were abused but because they get millions of dollars a yr plus bonuses to adopt out child. However in order to collect funds the child can’t have more than 2000 dollars in an account. So what type of account can I set up that counts as their balance but if I run into a hardship I can take it back

[nashcollins]

My mother robbed from me worked with a judge to do it and claim I am a drug addict. Which is false. And now I currently have a criminal record and ran from my state once i realized because they want me locked up in prison. Meanwhile this judge has a brand new home and I am penniless and unable to go home for fear of being locked up. Completely emotionally wrecked that my mother would steal money received from after my fathers passing that was in my name when i was a minor. Fast forward 30 years this has been a lifetime of deception from the only parent I had left. And I feel as if now that her age is of retirement she made her estate plan out and Completely has disinherited me....currently going on 6 years no contact with my family. Intense emotions behind all the greed.

[whit]

If deposit an inheritance check from a relative well over the gift tax amount is there be a tax liability? Or does proving it’s inheritance negate the tax liability?

[izik]

Nice content! What kind of funds are recommended in such accounts (UTMA) for kids ? Stocks, REITS, ETFs? Thanks!

[FarjanaHasan-jw]

Brown Amy Williams Sarah Garcia Timothy

[motivateinmotion]

Why would someone rob their own kid smh