UTMA Custodianships and Subtrusts

When making your living trust with WillMaker, if you choose to provide property management for your young beneficiaries, you'll need to decide between using an UTMA custodianship or a children's subtrust. You can learn more about this choice in Property Management for Young Beneficiaries.

Here, you can learn details about both choices.

Uniform Transfers to Minors Act (UTMA) Custodianships

Think an UTMA custodianship is right for your family? Here's how it works.

How a Custodianship Works

In the trust document, you name someone to serve as custodian for a particular beneficiary. That person manages any trust property the young beneficiary inherits until the beneficiary reaches the age at which state law says the custodianship must end.

EXAMPLE: In her living trust, Sandra leaves 100 shares of General Motors stock to her niece, Jennifer. She names Hazel, Jennifer's mother, as custodian under the Illinois Uniform Transfers to Minors Act.

After Sandra's death, her successor trustee gives the stock to the custodian, Hazel. She will manage it for Jennifer until Jennifer turns 21, the age Illinois law says she must be given the property outright.

In some states, you can specify -- within limits -- at what age the custodianship will end. If your state allows this, we'll ask you to enter the age at which you want the custodianship to end.

EXAMPLE: If Sandra, in the previous example, lived in New Jersey, the state's law would allow her to choose any age from 18 to 21 for the custodianship to end.

The Custodian's Responsibilities

A custodian has roughly the same responsibility as the trustee of a child's subtrust: to manage the beneficiary's property wisely and honestly. The custodian's authority and duties are set out by state law (the Uniform Transfers to Minors Act, as enacted by your state). No court directly supervises the custodian.

The custodian must:

  • manage the property until the beneficiary reaches the age at which, by law, he or she gets the property outright
  • use the property or income to pay for expenses such as the young beneficiary's support, education and health care
  • keep the property separate from his or her own property, and
  • keep separate records of transactions. The custodian does not have to file a separate income tax return; income from the property can be reported on the young beneficiary's return. (By comparison, the trustee of a child's subtrust must file a separate tax return for the subtrust.)

A custodian who needs to hire an accountant, tax lawyer or other expert can use the property to pay a reasonable amount for the help.

If state law allows it, the custodian is entitled to reasonable compensation and reimbursement for reasonable expenses. The payment, if any is taken, comes from the custodial property.

Choosing a Custodian

You may name one custodian to manage the property you leave to a young person under UTMA. You can also name one alternate, who will take over if your first choice is unable to serve.

Choosing someone to manage your children's finances is almost as important a decision as choosing someone to take custody of them after your death -- and many people will choose the same person to handle both tasks. Name someone you trust, who is familiar with managing the kind of assets you leave to your children and who shares your attitudes and values about how the money should be spent.

WARNING: Parents do not get the job automatically. You may be surprised to learn that the child's other parent probably will not be able to automatically step in and handle property you leave to children. Rather, unless you provide for management, that other parent may have to petition the court to be appointed as the property manager and then handle the property under court supervision until the children turn 18. So, if you want your children's other parent to manage the property you are leaving your under UTMA, name him or her as custodian.

Whomever you choose as custodian, it is essential to get his or her consent first. This will also give you a chance to discuss, in general terms, how you would like the property to be managed to be sure the manager you select agrees with your vision and fully understands the beneficiary's needs.

There are a few general principles to follow when choosing a custodian or trustee. As a general rule, your choice should live in or near to the state where the property will be managed -- or at least be willing to travel there if needed.

You need not worry about finding a financial wizard to manage the property. The custodian has the power to hire professionals to prepare accountings and tax returns and to give investment advice. Anyone hired for such help may be paid out of the property being managed. The custodian's main jobs are to manage the property honestly, make basic decisions about how to take care of the assets wisely and sensibly mete out the money to the trust beneficiary.

It is usually preferable to combine the personal care and property management functions for a particular minor child in the hands of one person. Think first who is likely to be caring for the children if you die, and then consider whether that person is also a good choice for property manager. If you must name two different people, try to choose people who get along well; they will have to work together.

If you believe that the person who will be caring for the minor is not the best person to handle the minor's finances, consider another adult who is capable and is willing to serve.

For property you leave to young adults, select an honest person with business savvy to manage the property.

You must name a person as custodian of the UTMA. You cannot name an institution.

Children's Subtrusts

You can set up a separate child's subtrust for each young beneficiary.

How a Child's Subtrust Works

In your trust document, you state the age at which the beneficiary should receive trust property outright. If at your death the beneficiary is younger than the age you specified, a subtrust will be created for that beneficiary. (If the beneficiary is older, he or she gets the trust property with no strings attached, and no subtrust is created.) Each beneficiary gets a separate child's subtrust.

This trust is set up so that the successor trustee will serve as trustee of any children's subtrusts. If you want different people to manage property inherited by different beneficiaries, you may want to use a custodianship instead of a child's subtrust. (To appoint someone else to be trustee of a child's subtrust, the trust document would have to be changed significantly; see a lawyer.)

Whatever trust property the beneficiary is entitled to receive upon your death will go into the child's subtrust, if the child is still under the age set for termination of the subtrust. The trustee will manage the subtrust property and use it as necessary for the beneficiary's health, education and support. After your death, the subtrust cannot be revoked or amended. Until then, you are free to change your mind about having a subtrust set up for a particular beneficiary.

The child's subtrust will end when the beneficiary reaches the age you designated in your Declaration of Trust. This can be any age up to and including 35. The trustee will then give the beneficiary what remains of the subtrust property.

EXAMPLE 1: In his trust document, Stanley names his 14-year-old son Michael as beneficiary of $100,000 worth of stock. He specifies that any stock Michael becomes entitled to when Stanley dies should be kept in a subtrust until Michael is 25, subject to the trustee's right to spend it on Michael's behalf.

Stanley dies when Michael is 19. The stock goes into a subtrust for him, managed by the successor trustee of Stanley's living trust. The trustee uses the stock (or the income it produces) to pay for Michael's education and support. Michael receives what's left of the stock when he turns 25.

EXAMPLE 2: Victoria creates a living trust and leaves her trust property to her daughters, who are 22 and 25. She specifies that any trust property they inherit should stay in children's subtrusts until each daughter reaches 30. Victoria names her sister, Antoinette, as successor trustee.

Victoria dies in a car accident when one daughter is 28 and the other is 31. The 28-year-old's half of the trust property stays in a subtrust, managed by Antoinette, until she turns 30. The 31-year-old gets her half outright; no subtrust is created for her.

The Trustee's Duties

The subtrust trustee must:

  • manage and invest subtrust property until the beneficiary reaches the age set out in the trust document
  • keep the beneficiary (or the beneficiary's guardian, if the beneficiary is a minor) reasonably well informed about how the assets are being invested
  • use subtrust property or income to pay for expenses such as the beneficiary's support, education and health care
  • keep separate records of subtrust transactions, and
  • file income tax returns for the subtrust.

The trustee's powers and responsibilities are spelled out in the trust document. A trustee who needs to hire an accountant, tax lawyer or other expert can use subtrust assets to pay a reasonable amount for the help.

The trust document also provides that the trustee of a subtrust is entitled to reasonable compensation for acting as trustee. The trustee decides what is a reasonable amount; the compensation is paid from the subtrust assets.

For more on the trustee's responsibilities, see After a Grantor Dies.

Choosing an Age to End Management

For management under the UTMA, the age at which management terminates is seldom an issue. In all but a few states, the management terminates automatically at age 18 or 21; in some states, it can last until age 25. (See chart, below.)

Under a subchild's trust, you may select any age up to 35 for the management to end. Choosing an age for a particular beneficiary to get whatever trust property has not been spent on the beneficiary's needs will depend on:

  • the amount of money or other property involved
  • how much control you would like to impose over it
  • the beneficiary's likely level of maturity as a young adult (for small children, this may be difficult to predict, but by the time youngsters reach their teens, you should have a pretty good indication), and
  • whether the property you leave, such as rental property or a small business, needs sophisticated management that a young beneficiary is unlikely to master.