Trust Accounts: Uniform Transfers to Minors Act and Uniform Gifts to Minors Act

The Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) allows adults to transfer gifts to minors without the trouble of establishing a formal trust. The slight difference between UTMAs and UGMAs is the types of gifts that are allowed in each account. UTMAs can contain any tangible or intangible asset, including real estate, works of art, and intellectual property. While UGMAs are limited to financial assets. Are you a beneficiary of a UTMA or UGMA? If you think your brokerage firm failed to supervise your trust account, resulting in financial losses, you need to reach out to a New York Failure to Supervise Trusts Law Firm like Malecki Law. Depositing assets into these accounts represents an irrevocable transfer from the donor to the beneficiary. These types of accounts help children legally invest before they become adults.

When an adult transfers assets to a UTMA/UGMA account, a custodian is appointed for the minor until she hits the age of majority. States have statutes that specify the age of majority – differing from state to state. Once the beneficiary hits the age of majority, she takes control of the account as it is her property. While the custodian manages the account, he has a fiduciary duty to the beneficiary. This means that the adult custodian must manage the account in the best interest of the beneficiary, to the beneficiary’s benefit and not his own. The custodian can use the funds in the account to buy securities such as stocks, bonds, and mutual funds on behalf of the minor, but in line with his fiduciary duty may NOT engage with speculative instruments on behalf of the minor. If your custodian used trust funds to invest in speculative instruments, you should have a New York Failure to Supervise Trusts Attorney at Malecki Law review your account to analyze whether there was misconduct. For investing in speculative securities is not in the best interest of saving and building up the minor’s funds. The UTMA/UGMA account can be opened through a brokerage firm or bank. Family and friends can make contributions to the account, but these funds are irrevocable property of the beneficiary. Typically, UTMA/UGMA accounts are used to save up for a child’s education. Once a person funds a UTMA/UGMA account, they cannot change their mind and take the money out!

One negative about UGMA/UTMA accounts is that since the account is technically owned by the minor, it counts as the minor’s assets decreasing her chances of getting financial aid for college. Another negative aspect of these accounts that could arise is that if the family of the beneficiary is in financial trouble, money could not be taken out of the account to pay bills and such since it is the minor’s property.

A benefit of setting up a UTMA/UGMA account is the way taxes work with the account. Contributions to the UTMA/UGMA account are made with after-tax dollars, so money can be withdrawn without tax. The way the investment income is taxed also has perks. The IRS exempts $1,100 of the UTMA/UGMA account’s passive income each year. Then the next $1,100 is taxed at the account holder’s federal income tax. The account holder is a minor, so the amount the minor is taxed will likely be based on the account income alone, likely a low tax bracket. Lastly, the IRS applies the “kiddie tax”. The “kiddie tax” applies to any income over the previous $2,200 at the parental tax rate.

To illustrate, an example of the tax scheme would be if a minor were to earn $2,300. The first $1,100 would be exempt, then the next $1,100 would be taxed at the minor’s rate, and finally, the $100 exceeding the $2,200 would be taxed at the parent’s rate (kiddie tax). To sum up, children only owe taxes when they sell investments for profit or receive unearned income like stock dividends. If you’re a trust beneficiary who incurred unexpected tax liabilities due to activity in your trust account, you should consult with a Failure to Supervise Trusts Lawyer in New York. The lawyers at Malecki Law are well-versed in this space and will review your accounts.

Custodianship is supposed to terminate when the beneficiary reaches the age of majority, but many brokerage firms do not have effective supervisory procedures in place, allowing custodians to control the account way after the beneficiary should be able to. These firms do not have reasonable systems and procedures to determine when the beneficiary is of age to take over the account, but they should, and the fiduciary should cooperate in the transition.

Some tools that would be effective for firms to add would be a system to track when custodianship is set to terminate. A tool like this could even be enhanced with an alert notifying representatives at firms when the beneficiary reaches majority age. In addition, communication with the custodian when their control of the account ends and what happens from there would also be helpful for a peaceful transition. Verification that the custodian has the authority to manage the assets after a certain age will assist in making firms more prudent. Keeping track of dates throughout the relationship with the beneficiary and even creating a new account for them once they hit majority age would affirm that firms would not miss deadlines. A Failure to Supervise Trusts Law Firm in New York, like Malecki Law, has expertise in the supervision of trust accounts. Malecki Law can review your potential case for free.