UTMA Question
We have a client that has an UTMA account and he doesn’t want to give the child the money. But the wife has done research and someone told her that they would have to prove the money was used for the benefit of the child at tax time. She wants the husband to give the child the money and she is concerned that this would be a legal matter. Would that be the case? And what would be the tax consequences if he didn’t use the money for the benefit of the child?
Permalink Submitted by William Tuttle on Thu, 2022-05-05 17:13
A UTMA account is owned by the minor, not the custodian. The custodian has a fiduciary responsibility to manage the account’s assets and only make distributions FBO the account owner.
Once assets are deposited into a UTMA account they are an irrevocable gift. The assets no longer belong to the donor and/or custodian. They can never revert to either one.
All UTMA withdrawls must be contemporaneous for the benefit of the account owner. The withdrawal can be for direct payment or indirect distribution to the custodian for reimbursment. While these latter distributions can be before or after payment of the qualified benefit.
Most experts believe they should be within a matter of months. In other words, the custodian cannot retroactively claim reimbursement for expenses in prior years.
Also, a UTMA account can not be used for ordinary family support obligations. It needs to be something other than ordinary food, shelter, health, clothing, transportation, etc…
They are normally used for extra curricular activities, summer camps/not for day care purposes, electronics, extra teenager clothing (especially girls), even for a vehicle primarily for their use, etc…
There are no hard and fast rules. However, with my girls, it was pretty apparent what should be on my dime and what should be on theirs
Notwithstanding the fact that it is morally and ethically despicable for a father to steal money from their children. Custodians can be ordered, sanctioned, held in contempt and in extreme cases even criminally charged for misuse/theft of UTMA accounts.
Unfortunately, there is no UTMA proactive enforcement mechanism. The account owner or by a parent on their behalf (if still a minor) must petition the court for relief.
I don’t know what age the child is. At 14, the custodian is required to provide a full annual accounting if requested by the account owner.
At the age of termination* the custodian shall transfer control to the account owner without delay. The wife should verify what this is in the state the UTMA was first open. This state’s jurisdiction follows even with subsequent moves.
The wife should insist the husband follows his moral, ethical, legal and most important fatherly responsibilities.
*This is often referred as the age of majority. That is no longer applicable. Except for a few states, most states have an age of termination >= age 21.