Considerations Surrounding Custodial Accounts in Divorce

There are several options available to parents who want to create savings for their children. Many parents or family members choose to set up either a Uniform Gifts to Minors Act (“UGMA”) account or Uniform Transfers to Minors Act (“UTMA”) account to begin investments for a child. The UTMA is actually an extension of the earlier UGMA. Compared to traditional savings accounts, these accounts are more secure from creditors and third parties and often come with certain tax benefits. These accounts also prevent children from gaining access to money before they reach a certain age. These accounts are commonly created to save for a child’s higher education or to safeguard money that should remain invested and not spent. 529 plans are another popular vehicle used to save for a child’s college, and these funds can also be used for high school education. A 529 Plan may be set up as an individual or custodial account. With a custodial 529 plan, the child the plan was created for owns the account. By contrast, an individual 529 plan is legally the property of the account owner, often a parent.

Unlike the assets held by a UGMA or UTMA account, which may be used for any purpose, money held in a 529 plan must go towards qualified education expenses such as tuition, room and board, and books. If funds from a 529 plan are withdrawn for another purpose, a penalty will be incurred. Another major difference between 529 plans and UGMA/UTMA accounts is that funds in 529 plans grow tax-free. Additionally, funds in an individual 529 plan can be transferred to another child or grandchild if the child who was originally named as a beneficiary does not need the funds. Funds in a UGMA account, UTMA account, or custodial 529 plan typically cannot be transferred between children because the child named as the beneficiary also legally owns the funds. Earnings from a UGMA and UTMA account are typically taxed at the child’s, and not a parent’s, tax rate.

Between UGMA and UTMA accounts, there are a few notable differences. The biggest difference is that a UTMA account can hold any form of property, including real property, whereas a UGMA account may only hold financial assets such as cash, stocks, or bonds. Additionally, the UGMA has been adopted by all 50 states. The UTMA, however, has not been adopted by Vermont or South Carolina.

UGMA and UTMA accounts are custodial accounts. This means that the account custodian, often a parent, manages the account until the minor who the account was created for reaches the age of majority. Importantly, any transfer of property into a custodial account is irrevocable because it becomes the property of the minor at the time of transfer. However, the minor may not access the property until he or she reaches the age of majority. The age of majority in Ohio is 18 under the UGMA and 21 under the UTMA. The age of majority in Kentucky is 21 under the UGMA and 18 under the UTMA. The account custodian has a fiduciary duty to manage any assets within the account with the child’s best interests in mind.

UGMA accounts, UTMA accounts, and 529 plans must be addressed during a divorce. Generally, these can only have one account owner or custodian and only one beneficiary. So, it is important to determine who will operate as an account owner or custodian following a divorce and what access the other parent will have to review that account. Other important considerations include determining if and when further contributions will made to an account and whether there will be any limitations as to how the owner and/or custodian may use the account before the child reaches the age of majority.

It is important to speak with an attorney to discuss your options for addressing accounts set up for your children and ensuring that the savings for your children are protected in the event of divorce.