The laws of the Uniform Transfers to Minors Act (UTMA) differ from state to state. New York state allows a single custodian to manage a minor beneficiary's funds until they reach 21 years old, or 18 years old if specified by the account's creator.
UTMA accounts allow adults, such as parents or grandparents, to give financial gifts to minors, which they can use for whatever benefits them. This account also shields the child from gift tax consequences up to a value specified by state law. Once the minor reaches adulthood in New York, the remaining assets in a UTMA account go directly to the beneficiary.
What Is the Uniform Transfers to Minors Act?
The Uniform Transfers to Minors Act (UTMA) broadens the Uniform Gifts to Minors Act (UGMA), which allows individuals to give financial gifts to minors without setting up a trust. It is tax-free up to a specific amount, and its use is for anything that benefits the minor, including school supplies, dental braces or even music lessons. An appointed adult oversees a custodial account until the minor becomes an adult, typically between 18 and 25. In the state of New York, the age of majority is 21, unless the person creating the account specifies that it can be 18.
UTMA broadens the former act's (UGMA) definition of a gift. It not only includes money, but also real estate, art, royalties and even patents. It also limits the liability of an account custodianship – gifts given under the UTMA belong only to the minor, and the account has their Social Security number attached for identification purposes. The account is in the child's name, shifting tax liability to them, as they are usually in a lower tax bracket. For minors or students under 24 years old:
- Annual income under $1,000 is not taxed.
- Annual income from $1,000 to $2,000 is taxed at the child's rate.
- Annual income over $2,000 is taxed at rate of the adult who gifted the money to the minor.
Rights of the Minor Child Under UTMA
UTMA gifts are irrevocable, meaning that once the gift goes into the trust account, no one can reverse it. The child has the right to petition for fund payments, review records, designate a successor to the custodian, petition them to post bond and petition for an accounting.
Financial institutions are exempt from liability as long as they act in good faith. While they are responsible for safeguarding all funds at the institution, an account custodian has legal responsibility for the funds given to a minor. Anyone taking money from a minor's UTMA account or closing it for their own use is committing fraud. If a minor dies before becoming a legal adult, that gift becomes part of their estate.
Role of the Custodian
An UTMA account's custodian may collect, manage, hold, invest and reinvest a child's property. As long as they act honestly and with prudence, they do not need approval from a court. When the custodianship ends, the property belongs to the beneficiary, and they can use it however they like. Because the assets are irrevocable, the money is still theirs at the time of the account's termination.
If there is a will, an executor can create UTMA accounts, and if there is a trust, a trustee can create them if they need to transfer property and no one has named a custodian. Most states allow this unless the account is greater than a specific dollar limit, in which instance a court order approves the transfer. For example, New York state executors or trustees can create a custodial account that ends when the minor turns 18; if the amount of the gift is more than $50,000, the court must approve it.
Michelle Nati is an associate editor and writer who has reported on legal, criminal and government news for PasadenaNow.com and Complex Media. She holds a B.A. in Communications and English from Niagara University.