What is a UTMA?

Near the end of each school year, around graduation time, many of us wonder what we’re going to do for family members who are celebrating a milestone. For some, this milestone may be a preschool graduation, a 5th or 8th grade graduation, or, perhaps, a high school graduation. We may wonder the same thing when celebrating a birthday or Christmas. Often, money and a witty card is the right choice, especially if the amount is small. But when the amount is not small, a transfer under the UTMA or Kentucky Uniform Transfers to Minor Act may be the best option.

What is a UTMA transfer?

The UTMA allows property of any kind to be set aside for the benefit of a minor. In Kentucky, a minor is anyone under 18. Whoever sets the property aside for a minor chooses the person who will be responsible for the property until the minor reaches 18. This person is called the custodian.

There are very few restrictions on who may serve as a custodian. But when choosing a custodian, it should be someone who is trustworthy. The custodian must manage the property and protect it for the benefit of the minor.
If the property is money deposited in a bank account, it should be titled by naming the custodian followed by “custodian for (name of minor) under the Kentucky Uniform Transfers to Minors Act.”

If the property set aside for the minor is real estate, a similar designation should be used. Simply put, the property must clearly identify that it is being held by the custodian for the benefit of a minor under the Kentucky Uniform Transfers to Minors Act. Occasionally, the UTMA abbreviation is used when the title does not have enough room for Kentucky Uniform Transfers to Minors Act.

There is No Maximum Size UTMA.

One of the characteristics of a UTMA that makes it appealing is that there is not a maximum or minimum amount that can be set aside for the minor. That means the property accumulating under the UTMA for a minor can become substantial over time.

When the minor reaches age 18, they are no longer a minor. So the property set aside for them will come under their control, and they may use it for anything they want.

Receiving the money at age 18 can be a double-edged sword. On the one hand, the beneficiary will have it available for expenses we might consider worthwhile: to pay for college, automobile repairs, or travel expenses or to start a business. However, many 18-year-olds are not responsible enough to make the best use of what they receive. Instead, they may blow it or use it in ways that are less than ideal.

Many people think that the custodian who controls the UTMA for the minor will control how it is used after the minor reaches age 18. That is not the case. The 18-year-old can do anything with the UTMA. So when a UTMA is created, there is a risk that the 18-year-old will not be mature enough to make wise decisions with it. Fortunately, there are ways to get similar benefits of a UTMA while being able to protect the property from unwise uses after the beneficiary reaches age 18. When we’re concerned about how the property will be used and when we want to be confident it is used wisely, a trust can give us comfort and assurance.

Using a Trust Rather Than UTMA.

While UTMA is a great option when we are not concerned about how a beneficiary will use the property we set aside for them, it is not the best if we want to make sure the property is used wisely. A trust is the best option when we want to be confident the property is properly managed and used. Nevertheless, for some, especially for those setting aside amounts that will not reach $15,000 by the time the minor reaches 18, the UTMA will serve them well.