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Pros and Cons of The Uniform Transfer to Minors Act

Pros and Cons of The Uniform Transfer to Minors Act Image

We often get questions about how trusts compare to The Uniform Transfer to Minors Act (UTMA) accounts and recent court case helps explain the benefits of trust-base planning.

As background, UTMA is a popular way to make gifts to minor children. A parent can put money in an UTMA account, act as custodian of the account until the child reaches the age when he/she is a legal adult. At that time, the adult child owns the account. These accounts are easy to set up – no lawyers or courts – and free to administer. But the case mentioned highlights some flaws.

In this case, Marcus Soori-Arachi’s father set up a UTMA in 1998 when Marcus was 15. The account included $10,000 in cash and a variable fixed annuity which included a death benefit. The account was set up in Nebraska and it should have transferred to Marcus when he turned 19, but no one made changes to the account.

By 2017, Marcus and his wife were living in Rhode Island and filing for bankruptcy. The bankruptcy trustee came across the UTMA as he was finding and liquidating Marcus’s assets. The bank then changed the ownership of the account -- which had grown to $105,000 -- from Marcus’ father to Marcus. The bankruptcy trustee tried to claim the funds, but Marcus challenged saying the annuity belonged to the UTMA account. He further claimed that because of the death benefit, it was essentially a life insurance contract and should be treated differently based on Rhode Island law’s around life insurance and bankruptcy.

The judge rejected both arguments, saying the account belonged to Marcus on his 19th birthday regardless of whether the bank updated its records or not. The annuity was at that point, no longer an UTMA account. The judge also ruled the annuity was not life insurance.

The big takeaway here is that property titled to an UTMA account belongs to the minor. If the father had established a trust, the property in the trust would belong to the trust, not to Marcus, and would have been shielded (under Delaware law) from bankruptcy proceedings. It would also have protected against divorce, personal injury claims, etc.

What a difference that would have made in this story!

If you have questions about UTMA accounts and trust-based planning, let you help you out.