Dear Len & Rosie,

Years ago when our first grandchild was born, my husband and I bought a custodial account. As the years have past the parents of this grandchild are no longer married and we are not allowed to see him. I would like to close this account, as I feel that the mother will spend the money on herself when our grandson turns 18. We feel very strongly that she does not deserve any of the money. How can I cash in this account? I’m told custodial accounts are impossible to end.

Dona

Dear Dona,

Your grandson’s custodial account is an account created under the California Uniform Transfers to Minors Act, sometimes referred to as the UTMA. The primary advantage of UTMA accounts is that they are really simple. You or anyone else may give money, securities, or other assets to a minor, without the expense of creating and administering a trust.

Money in your grandson’s UTMA account is held under his Social Security Number, rather than a taxpayer identification number assigned by the IRS. Any income earned by the UTMA account is taxable to your grandson, instead of being taxed at the trust tax rate, and it’s extremely unlikely that there’s enough income to require filing an income tax return on your grandson’s behalf.

The downside of a UTMA account is that it’s no longer your money, even if you named yourself as custodian. The account is owned by your grandson. You may spend money from the custodial account on your grandchild, but you can’t take it back for yourselves. If you do so, you are committing a breach of fiduciary duty for which you may be sued, and you could even be criminally prosecuted for theft.

If either you or your spouse is the custodian, all you can do is to manage the money and turn it over to your grandson when he turns 18 unless you set up the account to hold his money until he reaches age 25. Do so discreetly and maybe his mother won’t get his hands on it. If the mother is custodian, you’re in a more difficult position. While your grandson is entitled to an accounting of his mother’s actions as custodian, you’re just the donor, and you have no rights at all. And forget about being able to fire her as custodian without cause. You need to prove that the custodian has already stolen from the custodial account.

The lesson here is that if you wish to make gifts to minors, you need to weigh the risks and benefits of each method of doing so. UTMA accounts are easy, but cannot be taken back once made. A gift made via a revocable trust is best from the perspective that you may retain the right to change or modify the gift up until your death, but the gifted money is subject to estate taxes, if you are wealthy enough, and the claims of your creditors.

A very good option is to create a 529 Plan, via www.scholarshare.com. It’s an educational fund that grows tax-free until money is distributed to pay for the educational expenses. You can also pick your own successor participant to manage the account in the event of your death or incapacity. With a 529 plan, you could have ensured that the money you gifted to your grandson would be used solely for educational purposes.

Finally, remember that it’s not your grandson’s fault that you are not allowed to see him, and that if you are the custodian of his account, there must surely be a way to get him the money without it passing through the grubby hands of his mother.

Len & Rosie

Tillem McNichol & Brown