Tips on Handling Uniform Gifts to Minors Account (UGMAs)

I’ve been hearing a lot from parents and grandparents who set up Uniform Gift To Minors Act accounts for the youngsters and now have second thoughts. The problem with these accounts, as I’ve reported in past visits, is that once the child hits age 18 (21 in some states), the account is all his. There’s nothing you can do to control or direct the use of the account. The youngster can spend the account on a car, a trip around the world, or on various unhealthy consumable items.

As the bull market turns UGMAs into very valuable accounts and as children become teenagers, parents and grandparents want to take the money out of an UGMA or transfer it to a trust with more restrictions.

Unfortunately, this cannot be done. Once you put the money into the UGMA account, the money is available only for the minor’s benefit. It cannot be taken back or transferred to some other vehicle with more restrictions. When the child turns the age of majority he gets full legal title to the money and can spend it any way he wants. The only thing you can do once he turns 18 is try to persuade him to transfer the money to a trust with restrictions on it.

But you do have some other options before age 18.

You can spend the money now if you are concerned about what the child will do with it. The money can be spent only for the child’s benefit, and it cannot be spent on items that are the parents’ legal obligations. Parents are required to provide the basics of food, shelter, health care, and clothing. In some states, other items such as education are considered parental obligations.

One option is to use UGMA funds for “extras” that you or the parents would have purchased anyway, then take the cash you would have spent on those items and put it in a trust. Examples of extras can include computers, entertainment, a car, and optional school trips. You might even consider sending the grandchild to private school before college with the money. The line between parental obligations and extras can be a thin one, and there isn’t much law on it in most states. I can give you these general rules and advise you to consult a local attorney if you are unsure about an item.

Some people have told me that they plan to get around this problem by having all statements related to the account sent to their offices so there is little chance that the child or grandchild will even know about the account until it has been spent on college tuition. I can’t encourage you to do that, and it certainly doesn’t take away the child’s legal rights to the property. You also might ask the broker or mutual fund that holds the account if they monitor the child’s age and take any actions, such as notifying the child, when the child is legally entitled to the money.