Use care when transferring major funds to your children

I opened a Uniform Transfer to Minors Act account for my child with the bank when she was young and now she is about to turn 18 years old, and I am concerned about turning over the account to her, which now has more than $50,000.

Many parents opened accounts pursuant to the Uniform Transfer to Minors Act when their children were young with the intent to save money for their children’s future college expenses, but the law does not require the child to use that money for college, and it must be turned over to the child when that child turns 18 years old. Note that in some cases the account does not turn over to the child until the child is 21 years old. The title of the account should indicate whether it is to be held until age 18 or 21.

New York law provides that a transfer made pursuant to the act is irrevocable and the custodial property is vested in the minor at the time of transfer, and cannot be annulled. The minor therefore has a legal right to the assets in the account upon the minor’s 18th birthday. As custodian of the account, you are obligated to inform the minor of those assets at the time the account completely vests in the minor. The statute does, however, state that the custodian “shall transfer in an appropriate manner the custodial property to the minor,” which provides some options for steps you may take if you are concerned about turning over a large account to your child.

Use the funds for the minor’s benefit:

Until the minor is 18, you can use the funds for the minor’s benefit. If you are also the parent of the minor, you may not use funds for items that are your support obligations to your child (such as food, clothing and shelter), but you may use the account to pay for “luxuries” such as private school, extracurricular activities, camp, or a new computer.

Transfer the assets to the minor:

When the minor is 18, you can retitle the Uniform Transfer to Minors Act account into an account in the minor’s name. You can, with the minor’s permission, be named a co-signer or receive duplicate statements to see how the minor spends the money. You may incentivize your child to use the funds responsibly by stating that you will pay for college with other funds if she keeps the funds for graduate school (as one example) or you may even use “strong-arm” tactics to state that you will reduce her inheritance if she uses the funds irresponsibly.

Purchase an income-producing asset:

You can use your discretion under “appropriate manner” to use the account funds to purchase an asset that the minor would not be able to easily liquidate once she receives it at age 18, such as income-producing real property or an annuity. This is not recommended, because it could be later reviewed as a breach of fiduciary duty. Fiduciary obligations include that a fiduciary must transfer assets to a beneficiary upon the termination of a fiduciary duty in a manner that is easily converted to cash. If, however, the minor consents in writing, this may help protect against a later claim.

529 Plan:

You may transfer the account proceeds into a newly created 529 Plan for the minor’s benefit. This will require liquidating any stocks or securities in the account because a 529 Plan can only be funded with cash. This may trigger capital gains taxes if the assets have increased in value significantly. However, transferring the funds to a 529 Plan will allow you to continue to be the custodian of the funds until the funds are completely withdrawn, thereby allowing you to withhold it to pay for college. However, if your child requests the funds at any time for any purpose you will need to release the funds or she may petition the court to receive the funds pursuant to your obligation as fiduciary of the account since you used those assets to fund the 529 Plan.

2503(c) Trust:

If you want to continue to hold the funds, you could create a living trust for the minor’s benefit under Internal Revenue Code § 2503(c). The terms of the trust can be drafted to allow you, as trustee, to make discretionary distributions and forced distributions at set ages, so the funds stay under your control until you believe your child is able to handle the account on her own. In order to deter future claims of breach of fiduciary duty, the trust should allow the minor a one-time withdrawal right, where she is afforded the opportunity to withdraw the funds up to the full amount when she turns 18 years old. Your child will have a 30- or 60-day window to do so. If she does not exercise her withdrawal right, the funds stay in trust pursuant to the trust agreement.

If your child does not exercise her right of withdrawal, the trust would then be considered a “self-settled” trust and any creditor of your child could potentially reach the funds to satisfy a judgment. If instead of setting up a new trust you keep the funds in the account after your child becomes 18 years old, she could demand the funds at any time. As discussed above, you can try to incentivize your child to not exercise her right of withdrawal in your discussions with her.

These suggestions are all options you may have; however, each situation is different and fact specific. If you have an Uniform Transfer to Minors Act account and are concerned about turning over the account to your child when she turns 18 or 21, you should speak to an attorney to discuss your options and which option is best for your situation.

Alison Arden Besunder is the founding attorney of the law firm of Arden Besunder P.C., where she assists new and not-so-new parents with their estate-planning needs. Her firm assists clients in Manhattan, Brooklyn, Queens, Nassau, and Suffolk Counties. You can find Alison Besunder on Twitter @estatetrustplan and on her website at