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Wednesday, June 4, 2014

Extending a Uniform Transfer to Minor Act Account

Uniform Transfer to Minor Act accounts (UTMAs) have become a popular way for parents, grandparents, guardians, or friends to hold money for minor children.

In Alaska, UTMAs are particularly popular for families who want to accumulate and invest Alaska Permanent Fund Dividend (PFD) checks for children to be used for their education.  These accounts are statutory trusts created and governed by state law.  At the time the account is opened, a custodian selects an age - no older than 25 - when the custodianship will end and the account is transferred to the child.  But what happens if a child is still not mature enough to manage the account when he or she reaches the age originally selected for the termination of the UTMA?  

Many parents have discovered that their child is not prepared to manage the account as they reach 18, 21, or even 25 years of age.  These parents and grandparents become frantic as the date approaches to transfer potentially thousands of dollars to children who are unprepared to handle the money.  Fortunately, in 2013 the Alaska Legislature modified the Alaska laws related to UTMAs and established a process that provides the custodian of an Alaska UTMA with the option to extend the time for disbursement past the original termination age, and even past the original statutory maximum of age 25.

Here is how the process works:  A custodian may extend the custodial term by giving the minor written notice of the custodian's intent to extend the term.  The notice must specify the duration of the extension and inform the minor of the minor's right to compel immediate distribution of the account. The notice must be given either during the six-month period immediately prior to the last day of the custodial term, or during the six-month period that begins on the minor's 18th birthday.  If the minor does not give the custodian notice within 90 days that he or she intends to compel immediate distribution of the account, then the term is extended to the date specified by the custodian.  

This procedure sounds workable until it is applied to a real-life situation.  Let's examine how this process could potentially work out:

Example Scenario:

In 1997, Mary Livingston established a UTMA for her daughter, Amanda, with the custodial term scheduled to end on Amanda's 25th birthday.  Amanda will turn 18 on July 15, 2014.  Mary has been depositing Amanda's PFD checks in the UTMA account.  In addition, Amanda's grandparents have made periodic gifts to Amanda to assist with her future educational needs, and these gifts have also been deposited into the UTMA account. The UTMA account is now $80,000.  Amanda has not done well in school and has become rebellious and difficult to deal with; she is using drugs and spending time with peers who are not a good influence on her.  Mary is concerned that Amanda is unlikely to go to college and may never get her life in order. The investments in the account might continue to grow to $100,000 or more in the next seven years, and Mary is worried about what Amanda will do with the money.  Mary wants to extend the term of the UTMA until age 35.

Under the statute, Mary can give Amanda written notice that the UTMA will be extended to age 35.  But Amanda also has to be given notice that she has the right to compel immediate distribution of the account.  So when should Mary give Amanda notice?  

Mary could give Amanda notice the day after she turns 18 and hope that Amanda isn't savvy enough to write back that she wants to terminate the account and take the money immediately.  The other option is to wait six years to see if Amanda's behavior improves, and to give notice in the six-month period before Amanda reaches age 25.  This is a troubling choice, because Amanda is bound to be a little wiser as she gets older, increasing the likelihood that Amanda will compel the distribution.

Our personal experience is that parents are able to exercise substantial control over children who are 17 or 18. At that age, it is very likely that the term can be extended with a properly drafted notice that is also delivered with an appropriate explanation to the child.  On the other hand, if a custodian waits until near the end of the term of the trust, when a child is nearing age 25 and more independent, it may not be easy to convince the child to agree to extend the term.  Still, many children remain dependent on parents well into their mid-to-late 20s, which can give a parent substantial control of the situation.  If a child is reasonable and practical, they will probably go along with the extension of the UTMA account term.

In either case, we recommend that clients consult with an attorney so that the notice can be properly drafted and so that the brokerage firm or bank is given proper notification that the statutory process has been completed, allowing the UTMA to be extended to a later date.

 





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Foley, Foley & Pearson, P.C. is a full service Estate Planning law firm. We offer our clients services in Probate Administration, Estate Taxes, Wills, Trusts, Disability and Incapacity Planning, Estate Administration, Corporate and Business Law, Business Succession Planning, and Planned Giving and Charitable Bequests.