The Uniform Transfers to Minors Act (UTMA) is a New York state law that lets parents or guardians preserve assets for children without having to establish a formal trust. Once your heir turns 21, everything in your UTMA account is transferred to the child—all without any need for an executor, trustee, or probate court.
However, even though a UTMA can help save money, it isn’t the right solution for everyone. In a worst-case scenario, relying too heavily on a UTMA could leave your heir vulnerable to mismanagement and prevent them from obtaining critical benefits, including student aid.
You don’t have to take chances with your child’s right to a fair inheritance. Landskind & Ricaforte Law Group, P.C. has spent years helping Brooklyn families find the best solutions for their circumstances. Here, our experienced New York estate planning lawyers explain when it makes sense to establish a UTMA account.
UTMA Accounts in New York City
Most people open UTMA accounts for their own children, but you don’t have to be related to the account beneficiary to open a new account or contribute to an existing one. The person who establishes a UTMA account is typically termed the custodian. The custodian has full control over the child’s account. Among other things, the custodian can:
- Contribute money
- Make investment decisions
- Withdraw funds for the child’s benefit
UTMA accounts are a type of irrevocable account, which means you can’t revoke the account or withdraw funds for your own use. However, so long as the account beneficiary is a minor, the custodian can withdraw UTMA funds for the child’s benefit. Approved expenses could include private school tuition, emergency medical bills, and anything else that is necessary for the beneficiary’s well-being and quality of life.
The child will receive everything in the UTMA account once they reach a certain age. In New York, this age is 21 by default, but the custodian can select the lower age of 18 when establishing the account. Once the account funds have been disbursed, the custodian loses control and cannot order the beneficiary to use, save, or spend the money in any particular manner. Depending on your family structure and priorities, this can either be a big advantage or one of the greatest downsides of choosing a UTMA over a trust or another estate planning device.
New York State Laws on UTMA Accounts
The rules for UTMA accounts are detailed in New York Estates, Powers, and Trusts Law §§ 7.61 – 7.626. For a UTMA account to be valid, the following conditions must exist:
You Must Make a Donation
An adult must establish the UTMA account on behalf of the child. If you set up a UTMA account, you will be considered the donor. You can do this through an attorney, a financial institution, or on your own. If you already have a trust, you can also transfer control of a UTMA to the trust.
You Must Appoint a Custodian
An adult must be appointed as the account custodian. The donor and the custodian do not have to be the same person. A trust can also serve as custodian, but if it is your own trust, any funds deposited into the account could be counted as estate assets.
Note that only one person can serve as an account custodian at a time. If you’d prefer a more flexible option, you may need to consider a living trust.
You Must Fund the UTMA Account
The UTMA account must be funded. You can fund a UTMA account with different types of assets, ranging from stocks and bonds to bank accounts and real property, firearms, and fine art.
The Custodian Must Act in the Best Interests of the Child
Custodians have the authority to make investments and repurpose UTMA account assets, provided that all such decisions are made in the sole interest of the child. While custodians cannot use UTMA assets for their own personal benefit, they are typically entitled to receive reasonable compensation and reimbursement for expenses. These types of payments can be made through the UTMA account or another established account.
Custodians do not have unlimited time to claim compensation. They may do so while acting as the custodian but not after their tenure has ended.
3 Reasons to Speak With a NY Estate Planning Lawyer Before Committing to a UTMA Account
UTMA accounts can be very powerful tools for parents, guardians, and other adults trying to ensure that their child receives an inheritance free from trustee or estate executor interference. However, UTMA accounts are not the right solution for everyone.
Before committing to a UTMA account, you need to consider the following factors:
- You can’t take back donations. UTMA accounts are irrevocable. Unlike other kinds of irrevocable estate planning tools, like irrevocable trusts, there is no effective way to retrieve funds or assets from a UTMA account. In some cases, you may be able to move assets to another account—but only if that account is also established for the minor’s benefit.
- You give up control of your assets. Just like you can’t remove assets from a UTMA account, neither can you retain exclusive control of donated funds. You or your custodian can still access assets until your beneficiary turns 18 or 21. But you can’t use UTMA assets as you see fit, and you can’t hold them after the child reaches the age of majority.
- Your child could lose critical benefits. If your child receives a large gift from a UTMA account, it could compromise their ability to obtain critical government benefits, from federal student aid to disability-related compensation.
- Your beneficiary might be financially irresponsible. You probably wouldn’t want your child to squander their inheritance within a year of receiving it, but this is an all-too-common occurrence. If you have concerns about a child’s ability to manage money, you may be better off with an education savings account or a revocable living trust.
If you’re not sure if a UTMA account is the best fit for your family, the experienced team of estate planning lawyers at Landskind & Ricaforte Law Group, P.C. could help you set up an account or explore better alternatives.