A Uniform Transfers to Minors Act, or UTMA, account is a way to transfer money to an investment account for a child without having to set up a legal trust. The accounts are established with an adult listed as the custodian for the benefit of a minor child. The custodian manages the investments in the account and takes appropriate withdrawals for the child's expenses until the child reaches a majority age. Specific rules dictate when and for what purpose withdrawals can be taken from these custodial accounts.
Ownership and Withdrawals
Any money placed into a UTMA account is the legal property of the beneficiary child. As a minor, a child cannot access the money in the account directly. Rather, the custodian is charged with the responsibility of taking appropriate distributions, which must be for the benefit of the child. The law offers a lot of latitude regarding what is "for the benefit of the child." As long as you can document that what you have spent the money on benefits the child, you shouldn't run into any problems. Music lessons, braces, a computer for school or even a car are allowable withdrawals from a UTMA.
While the laws differ from state to state, once a minor becomes an adult, he can legally withdraw from a UTMA account. In most states, the age of majority for UTMA accounts is either 18 or 21. When a child reaches adulthood, most custodians will transfer the money from the UTMA to a standard savings or investment account in the child's sole name, with no custodian listed. This facilitates future withdrawals by the beneficiary, as money in a noncustodial savings account can be withdrawn by the legal owner with no restrictions.
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Consequences of Improper Withdrawals
As a custodian, you can run into serious trouble if you take an improper withdrawal from an UTMA account. For starters, you'd be essentially stealing money from your child, as the money doesn't belong to the custodian but to the child. If the child knows the account exists, this could create an irreparable rift. Beyond that, accessing the money for your own purposes is illegal. While prosecution may be unlikely, the fact remains that you would be open to accusations of theft or embezzlement. Your child, or someone acting on his behalf, could even sue you for the money.