UTMA transfers a great way to set aside funds for the next generation

By Glen T. Eichelberger
Merrill Lynch Trust Company

It is never too early to begin saving for some special young person in your life. However, there is a practical problem with starting a savings account or giving assets to the young - individuals under age 18 in Texas are not legally (or practically) capable of owning and managing those assets.

One solution is to consult an attorney who works in the area of estate planning to assist you in creating a special gifting trust. However, hiring an attorney to assist you in the creation of a trust could cost in the thousands of dollars, depending on the complexity of its provisions.

Another solution, which may not require the involvement of an estate planning attorney, is to take advantage of the Texas Uniform Transfers to Minors Act (“UTMA”).

Generally, a resident of Texas who is under the age of 18 (a “minor”) is legally unable to own and manage their own property. For this reason, it is never a good idea to make a financial gift (other than small amounts of cash at birthdays or special occasions that you intend the child to spend as he or she pleases) to a minor.

Utilizing UTMA makes it easier to make gifts to minors by providing a set of rules that spell out how bank or brokerage accounts can be opened, or the ownership of other assets can be set up. Under UTMA, the individual who is making the gift simply names, at the time of the gift, a qualified individual over the age of 21, called a “custodian,” to hold, invest and manage the assets for the benefit of the minor.

You can name yourself as the custodian of assets you are gifting to a minor, but there are estate tax consequences for doing so which you should discuss with your tax advisor. UTMA also only allows one custodian to serve at a time, but it does allow you to name back up custodians in the event that the first named custodian becomes unable to serve as custodian.

Naming a custodian may be accomplished in a written document that provides that the asset is transferred “to (name of custodian) as custodian for (name of minor) under the Texas Uniform Transfers to Minors Act.”

Banks and brokerage firms have standard forms for opening UTMA accounts. It is also possible to transfer assets other than cash and securities held in bank or brokerage accounts to a custodian under UTMA by following the UTMA guidelines.

  • The custodian that you select must hold and manage the property entrusted to them in a way that protects the property for the benefit of the minor. Other than being reimbursed for out-of-pocket expenses and being allowed to claim reasonable compensation, distributions from the assets held under UTMA can only be made for the benefit of the minor. Income on the assets in the account are taxed to the minor.

  • When the minor becomes 21, the assets held by the custodian must be given directly to the minor. On this point, a word of caution is in order. Many people who have created accounts under UTMA that grow in value over time become reluctant to turn the assets over to the minor at age 21. However, that is required under UTMA. Therefore, it is important to make sure that you will be comfortable turning the custodial assets over to the minor when he or she becomes age 21.

  • Of course, gifts made into UTMA accounts are subject to normal Federal gift tax rules that your tax advisor can explain to you. You should also consult your tax advisor if the gift you are making is to your grandchild since special rules apply to so-called “generation-skipping” transfers.

Given the right circumstances, transfers under UTMA can be a great way to set aside funds for the next generation.

This article is provided as a service by the Probate, Trusts & Estates Section of the Houston Bar Association. Glen T. Eichelberger is a vice president and relationship manager with Merrill Lynch Trust Company's Family Office Group in Houston. His practice focuses on wealth management, wealth transfer and charitable planning for high net worth families.