When to Use an UTMA Account:
Things to Consider

Sometimes family members who are in line to receive gifts or money through inheritance are too young to handle it properly.

If I had my choice, my clients would always create trusts to manage and distribute money for the benefit of young beneficiaries. However, trusts cost money and substantial effort to create. They are also costly and timeconsuming to administer. For many, trusts are not an effective way to take care of young beneficiaries.

To help create practical choices for taking care of money for young family members, the state governments came together to essentially create simplified trusts. The first set of these rules were the Uniform Gifts to Minors Act (UGMA). Since UGMA and its variations were enacted, the state governments came up with a new, improved version of the rules called the Uniform Transfers to Minors Act (UTMA).

Together, UGMA and UTMA accounts are referred to as custodial accounts. Custodial accounts name a minor beneficiary and a custodian, who is likely to be a responsible adult.

Here’s the language that should be used to name a custodial account owner or beneficiary under the UTMA model act:

(Name of custodian) as custodian for ____________________ (name of minor) under the [Name of Enacting State] Uniform Transfers to Minors Act

How should a person decide between using a trust or a custodial account? A trust has these advantages:

• Trusts are not limited to minor beneficiaries
• A trust can last longer than a custodial account
• A trust can be made more flexible on how to use money than a custodial account
• More than one beneficiary is OK with a trust, not with a custodial account
• More than one trustee is OK with a trust, not with a custodial account
• A measured release of control in favor of the beneficiary is permitted with a trust
• A trust can be structured to meet a number of objectives, including special needs

Custodial accounts are the right choice where the following factors are the most important:

• Cost to set up
• Ease of administration
• Familiarity of the financial institution with the administrative rules

While simple and cost-effective to create, custodial accounts are less flexible than trusts. In cases where our clients want flexible control over the beneficiary’s asset, using a trust rather than a custodial account should be considered.

Are you wondering whether to use a custodial account or a trust to take care of your kids, your grandkids or other relatives? Give me a call and let’s talk it over.

As always, please feel free to call to discuss these of other financial security issues of concern.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your situation with a qualified tax or legal advisor. This material was prepared for use by LPL Financial advisors affiliated with Bay Financial Associates, LLC.

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