Education Trust

Transferring Education Savings Accounts to a Trust with Kiss Trust

By Ned Armand, President of Eastern Point Trust Company

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UGMA/UTMA accounts mature when the Beneficiary reaches the age of 18 or 21 (depending on the state). And that has many parents panicking because the beneficiaries of those accounts have open access to the funds once maturity occurs. This happens whether the donor desires this, or not. With a trust, you can restrict the use of assets better than any other financial tool available, simply allowing you (the Grantor) to stipulate the distribution terms.

Delay access and regain control of assets in an UGMA/UTMA account

A way to regain control of the assets in an UGMA/UTMA account is to create a trust to succeed the UTMA/UGMA account. Here’s how:

  1. Create a 3rd-party irrevocable trust with Kiss Trust (EPTC, the Trustee, will replace the UTMA/UGMA account custodian)
  2. Transfer the funds from the account into the trust
  3. Close the UGMA/UTMA account

Rules of UGMA & UTMA accounts

If you are considering opening an UGMA or UTMA account, or already have one open, it is important to understand the rules.

  1. Each UTMA/UGMA account has only one Beneficiary (a minor child) and one Custodian (usually a parent).
  2. The Custodian has “all rights, powers, duties and authority over such assets.”
  3. When the Beneficiary reaches the age of majority, the Beneficiary has full and unfettered access to the account.
  4. Asset in an UTMA/UGMA account is irrevocable, thus the Custodian cannot use UTMA/UGMA assets for the benefit of anyone other than the minor, or beneficiary of the account.
  5. The Custodian of an UTMA/UGMA account may use “so much of the custodial property as the custodian considers advisable for the use and benefit of the minor, without court order.” Thus, there is a clear basis for the Custodian’s discretion to use the assets for the minor’s direct or indirect benefit.

As noted, when the Beneficiary attains the age of majority or dies, the Custodian must transfer the assets to the Beneficiary or the Beneficiary’s estate. However, prior to the age of majority the Custodian has the right to transfer UTMA/UGMA account assets into a trust or another investment vehicle that benefits the Beneficiary.

We note that there are no known court precedents voiding the Custodian’s right to make such a preemptive transfer, as long as the new trust does not delay the availability of benefits until the death of the donors. Thus, if the Custodian has a “reasoned basis” for delaying the Beneficiary’s access to the assets, and there is no dilution of the custodial assets, then preemptive delay is appropriate. A “reasoned basis” can be as simple as the Custodian’s judgement that the Beneficiary will use the assets to his or her harm, or that the Beneficiary may waste the assets frivolously or imprudently.

The UTMA/UGMA account custodian is not subject to the usual fiduciary duties of a trustee—the Custodian’s only duty is that the property be used for the minor’s benefit. This “beneficial use standard” is satisfied if the Custodian transfers the property to a trust that benefits the same Beneficiary exclusively.

Converting a UTMA/UGMA into a Kiss Trust is a wise decision and will give you the peace of mind of knowing that the assets will be spent how and when you (the Grantor) wants, based on the distribution terms of the trust.

GO TO YOUR ACCOUNT TO BEGIN:

Go to Your Account


by Ned Armand, President of Eastern Point Trust Company

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