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Overview
Most
financial institutions, at some point, have dealt with
a depositor who wants to open an account for their child.
Often, this accountholder is unsure as to how to structure
the account. All they know is that they want to limit
the child's access to the account until he or she is
of "age". So how should things be handled?
Can an account be opened for a child without letting
the child get at the funds? Whose tax number should
you collect? Should the child sign the account agreement?
This
article will attempt to answer these questions and more
by reviewing the Uniform Transfers to Minors Act (UTMA)
or the Uniform Gifts to Minors Act (UGMA).
What
is a UTMA/UGMA account?
The
Uniform Gift to Minors Act (UGMA) or the Uniform Transfers
to Minors Act (UTMA) provides an alternative for structuring
accounts owned by children. Most states have adopted
one form of these uniform acts as a means of transferring
ownership of property to children. Both UTMA and UGMA
provide for similar account features. Essentially, the
Acts allow a person to fund an account for a child,
but limit that child's access to the account until the
child reaches the age of majority. The age of majority
is set by state law and typically ranges from 18 to
21.
In
general terms, an account established pursuant to UTMA
or UGMA is a type of custodial account. The child is
the account owner, but the parent (or other adult) is
named as custodian. The custodian controls the account
until the child is no longer a minor. At that point,
the custodial relationship ends and the child controls
the account.
How should UTMA/UGMA accounts
be documented?
In
order to have a valid UGMA/UTMA account, specific titling
standards under state law must be followed. If the account
is titled according to state law, then that particular
state statute will govern the account with respect to
terms and conditions. Once state law controls, there
is no need to contract for the terms specific to UTMA/UGMA
accounts.
Generally
speaking, UTMA/UGMA accounts are titled as follows:
"(Name
of Custodian), as Custodian for (Name of Minor)
under the (Name of State) Uniform (Transfers
or Gifts) to Minors Act."
Keep
in mind, there may be some slight variations on the
above titling depending on the wording of your state
law. You may not necessarily have to use the Act's suggestions
verbatim, and may instead want to go with a substantively
similar variation. For instance, many institutions like
to have the minor's name appear first in the title,
to match up with the SSN used for interest reporting
purposes. Consult with your legal counsel when deciding
how your institution will title accounts under UTMA/UGMA.
Should the child sign the
account agreement?
There
are no hard and fast rules that apply in this situation.
The parent or custodian certainly must sign at account
opening. The minor, who may be very young or not even
present when such an account is opened, need not sign
the account agreement. However, it certainly would not
hurt to collect the signature where the minor is old
enough to provide it.
If
you do collect the minor's signature, keep in mind that
the minor may not conduct transactions on the account
until after the minor has reached the age of majority
and the account has been fully transferred to him or
her.
Ultimately,
whether or not to collect the child's signature is a
matter of policy that should be set after consulting
with your legal counsel.
Can both parents be custodians
on an UTMA /UGMA) account?
Generally,
the answer here is no. There appears to be only one
state, Tennessee, where the law expressly allows for
both parents to act as co-custodians. One way for parents
to both be named on the account would be to name one
parent as custodian and the other as successor custodian.
What is the maximum contribution
allowed for an UTMA account?
There
is no maximum contribution under UTMA/UGMA. Accountholders
who are concerned about limits on contributions may
be confusing UTMA accounts with contribution limits
applicable to tax-friendly retirement plans. Be careful
that your account holders understand the difference,
including the nature of the transfer of ownership to
the minor and custodial responsibility they take on
when opening this type of account. It may be wise to
encourage your customers and members to consult with
their own legal and financial advisors before establishing
any type of custodial account.
Must a special form be used
to open an UTMA/UGMA account?
The
answer to this question is no. The various state laws
do not prescribe any type of model form to use when
opening an UTMA or UGMA account. The only real rule
is to use the "magic" titling language if
you want the Act to apply. Be sure you have reviewed
your state law with your counsel and have policies in
place to insure that the correct titling is used.
Conclusion
When
it comes to establishing accounts for their children,
parents are often confused as to the type of accounts
that will best serve their needs. While you certainly
can advise accountholders as to the accounts your institution
offers, it is not wise to make specific recommendations.
Ultimately, the account holder needs to make an independent
decision with the advise of their own advisors. To help
you "educate" your accountholders, Bankers
Systems has created a special brochure that explains
some of the ins and outs of an UTMA/UGMA account. For
more information, see the right side bar to this article.
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