UTMA Custodial Accounts: Transferring a UTMA Account to a Trust

The Uniform Transfers to Minors Act (UTMA or the Act) of each state provides for the management, use, and disposition of property gifted or otherwise transferred to a minor. The provisions of the Act apply to a transfer that makes reference to the Act as adopted by each state (e.g., the Georgia Transfers to Minors Act) in the designation of the transfer. These accounts are commonly called Custodial Accounts — not to be confused with a Conservatorship or Conservatorship account, which is an account created for a minor or an incompetent adult through a legal court process.

Custodial Account Overview

Transfers under the UTMA are irrevocable and leave the donor with no legal or equitable rights in the property. Rather, title is registered in the name of a custodian for the benefit of the minor. The custodian has broad powers regarding the use of the funds for the minor and serves in a fiduciary capacity. The minor is legally entitled to all funds in the custodial account upon attaining age 21.

These accounts work well for small stock holdings or small amounts of cash, but should generally not be used for significant transfers or transfers that will significantly grow over time, as a young adult at age 21 may not be capable of responsibly handling large sums. As age 21 approaches and the asset has grown, or the young adult remains immature or irresponsible, this is when remorse sets in, with the parent/custodian regretting having not created a trust at the outset.

So, when you have a situation where a custodial account exists, and it has grown to an amount that is “too much” to turn over to a 21 year old, what can you do? Are there options? Maybe, though the answer may vary with state law.

Transferring Custodial Accounts


An option might be to transfer the funds from an existing custodial account into a trust for the benefit of the minor or young adult, such that the recipient does not receive a significant lump sum until a later age, such as age 25 or 30 or beyond.

Arguably, in states that have adopted the Act without any or any significant changes to the model language (including, for example, Georgia, Alabama, and Florida), no specific legal barrier exists under the Act that would prevent the custodian from transferring property from the UTMA custodial account to a separate trust in which the custodial account beneficiary is the sole trust beneficiary.

The provision of the Act we focus on is the provision to turn over the property of a UTMA account to the beneficiary at age 21 pursuant to Section 20 of the Act. However, the specific language of that section provides that “the custodian shall transfer the funds in an appropriate manner upon…the minor’s attainment of 21 years of age” [emphasis added], leaving open the question of “what is an appropriate manner?”

In states that have adopted Section 20 of the Model Act as drafted, it can certainly be argued that a transfer of custodial funds to a trust for the minor’s protection and benefit is suitable, proper, and a transfer “in an appropriate manner.”  The comments to the Act provide no further direction on what constitutes an “appropriate manner.” One could certainly argue that the drafters of the Act could have provided that the funds or assets in the account be delivered “outright” or “in fee simple” to the beneficiary upon attaining age 21 if that were the only option. Likewise, state legislatures could have removed the language “in an appropriate manner” (as the Ohio legislature did), giving rise to a clear implication in such states that the delivery at age 21 may only be outright in fee simple. The very fact that it directs delivery “in an appropriate manner” would seem to be clear indication that there must be more options than simply outright delivery.

Further, the legislatures of states which have adopted this section of the Model Act without change to this section instead statutorily provided for delivery “in an appropriate manner”, supporting the argument that there exists flexibility in the method of the delivery of the funds or assets to the beneficiary. An “appropriate manner” should be construed as a “reasonable” manner with “reasonable” presumably being determined under the facts and circumstances. (“Reasonable” is defined as “fair, proper, just, moderate, suitable under the circumstances. Fit and appropriate to the end in view … synonymous with rational, honest, equitable, fair”, Black’s Law Dictionary, 6th ed.)

Concerns with Transferring to a Trust

Assuming a custodian is comfortable making a transfer from a UTMA account to a trust, are there concerns? Are there any steps the custodian undertaking such an action can take to protect himself from a subsequent claim by the minor?

Yes, and yes. Under the Act as discussed above, it can certainly be argued the custodian has the legal right to make such a transfer. After all, a custodian under the Act has the same rights and authority over the property “as unmarried adult owners have over their own property”. The concern, however, is whether such a transfer could be deemed to be a breach of fiduciary duty considering that by statute the funds are to be turned over at age 21, albeit “in an appropriate manner”. While the custodian may have numerous well-grounded reasons for desiring to delay the distribution including, for example, legitimate planning for creditor protection purposes or protecting the child from his own lack of judgment, the fact remains the custodian would effectively be terminating what would otherwise be the child’s right to obtain the funds at age 21, and whether such delay constitutes a delivery “in an appropriate manner”. So, is there a way to minimize or avoid entirely this concern?

Avoiding Claims of Fiduciary Breach

One way to (perhaps entirely) avoid a potential claim of fiduciary breach is to give the child a withdrawal power over the funds in the custodial account. In this manner, the custodian or third party would create an irrevocable trust which could extend well beyond age 21. However, the trust terms would include a withdrawal right, which would provide for notice to the child upon attaining age 21, of the assets in the trust and give the child a one time window of 30-60 days in which to elect to either withdraw some amount (up to all in the child’s discretion) of the trust upon attaining age 21 or allow it to be held pursuant to the terms of the trust.

The downside to providing a withdrawal right is the position that some portion or all of the trust assets could thereafter be reachable by the child’s creditors, since the trust could very likely be considered a ‘self-settled’ trust from that point on. Once the child has had the “right” to all of the funds, he may likely be treated as the Settlor of the trust for creditor purposes.

Additional Transfer Options

There are other ways to avoid making a large transfer to the child at age 21, including, for example, voluntary self settled trust at majority age (perhaps invoking the “golden rule”, i.e., he who has the gold, rules!), investing in income producing real property, purchasing an annuity, transferring the funds to a 529 plan, or other means, but these are outside the scope of this article, and each of these alternatives may raise their own concerns.

It may also be appropriate to consider each of these alternatives from a practical view. In each, the custodian is (presumably) not trying to prevent the child from ever or indefinitely having the money, or attempting to use it improperly for the custodian’s own benefit. Rather, the custodian is trying to preserve and protect the funds from possible waste or potential creditors or immaturity and poor judgement, by delaying the distribution. Practically speaking, what is the risk or likelihood that the child will actually bring a lawsuit for a purported breach? This may depend on the amount, the child, and the “economic risk” to the child (i.e., “If I sue, will mom/dad/other donor cut me out of their Will?”).

Further, even if the child does bring suit, what is the remedy, and what is the risk to the fiduciary? If a court finds the trust’s creation to be improper, it would likely order the immediate termination of the trust. So long as the funds remain intact, and are fairly liquid, what are the damages to the child? In other words, other than turning over the funds, and perhaps being ordered to pay the child’s legal fees, is there likely to be any punitive penalty assessed to the custodian/trustee, especially if the actions were taken in good faith and the funds are intact and were properly handled? While anything is possible, one would expect not.

In the end, this decision must be made through careful analysis on a case by case and state by state basis and upon advice of legal counsel, being aware of the possible ramifications.


Some state’s versions of the Act specifically authorize what are known as a 2503(c) Minor’s Trust. However, these trusts automatically terminate at age 21 (unless there is a “withdrawal power” as discussed above, and then it may continue on, although as noted, there is the question of whether the trust is thereafter treated as self-settled for creditor purposes).


If a custodian wants to create a trust to hold the custodial funds beyond age 21, there are basically two options. Create a trust with no “withdrawal right” at age 21, cognizant of the risk that the beneficiary could perhaps bring suit for a fiduciary breach, or to simply void the transfer; or, alternatively, create the trust with a “withdrawal right” at age 21, cognizant of the fact that the creditors of the beneficiary would likely thereafter be able to reach trust assets as a self settled trust. In the end, many clients will still prefer the potential risks of one of these alternatives to the child receiving a substantial sum outright at age 21.


This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-lawyer relationship between Hall Booth Smith, P.C. and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material. This material may be considered attorney advertising in some jurisdictions. Prior results do not guarantee a similar outcome.

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