Take-Away#1: Wills and trust instruments regularly authorize the transfer of assets to the custodian for a minor beneficiary under the Michigan Uniform Transfers to Minors Act (UTMA). That Act permits a delay in the distribution of the custodial assets until the individual (no longer a minor) attains the age of no greater than age 21 years. Some states permit the delay in distribution from a UTMA account to later age, e.g. 25 years in California and Ohio. A review of the UTMA is important to understand how the UTMA account works, and more importantly how it is taxed under the 2017 Tax Act, and what responsibilities are delegated to the custodian.


Take-Away #2: In my next missive, I will try to address the frequently encountered anxiety of parents or grandparents who funded a UTMA which resulted in a highly successful  investment performance, and who now face the horror of what to do when a substantial amount of assets is about ready to be distributed from the UTMA to its beneficiary who is turning age 21 years. Corvettes? Pizza for the entire dormitory floor every Friday night? You get the picture.


UTMA Statute: The 8 page Michigan UTMA is found at MCL 554.521 et. seq.


Background: What started out in Michigan as the Uniform Gifts to Minors Act in 1959 morphed into the Uniform Transfers to Minors Act (UTMA) in 1998. The 1998 version permits a much broader scope of assets that can be held in a UTMA than just cash. All kinds of assets can be held in a UTMA, including real estate, tangible personal property (e.g. autos, collectibles, guns) , intangible personal property (e.g. stock (registered and non-registered), partnership interests, private equity interests, contractual rights, promissory notes etc.) or life insurance. How a UTMA account functions may come as a bit of a surprise to some, not to mention how it will be taxed starting this calendar year. For ease of discussion the beneficiary of the UTMA will be simply referred to as the minor, even though a person age 18 years is legally an adult in Michigan.

Ownership: The legal ownership of the custodial property is vested in the minor, not the custodian. Consequently,  it is not a trust relationship, where the custodian holds legal title for the minor’s benefit. Title is with the minor.

Old Taxation: Formerly the income earned by the custodial assets was taxed to the minor, not the custodian, even if the income was accumulated inside the UTMA, unlike a trust relationship. This exposed the UTMA income to the Tax Code’s “Kiddie Tax” at the minor’s parent’s marginal income tax rate.

New Taxation: One big change caused by the 2017 Tax Act is that the unearned income of a UTMA will be taxed as an irrevocable trust; accordingly, UTMA income will be subject to the maximum 37% federal income tax rate at over $12,500 of accumulated income. In the past, due to the “Kiddie Tax,” the UTMA income was taxed at the minor’s parents’ marginal income tax rate. Consequently,  it is possible that the UTMA’s accumulated income will be taxed higher federal income rates, depending on how the UTMA assets are invested. While the UTMA income could be distributed to the minor, that tends to defeat the purpose of the UTMA to accumulate wealth to be available at a later age.

Age of Distribution- “Delay”: Michigan’s UTMA normally provides for the distribution of the UTMA account when the minor attains the age 18 years. But the Act permits the individual who establishes the UTMA account to initially opt for a later age of distribution, but that other age cannot be later than the minor’s 21st As noted above, some states like Ohio permit the choice of a delayed distribution to when the minor attains age 25 years, so selecting the jurisdiction where the custodial account is established can provide greater control over the UTMA assets to the custodian until the minor is well out of college and graduate school.

The ‘Gorilla Rule:’ There’s an old saying that a ‘gorilla sleeps where a gorilla wants to sleep’ an observation that is often ascribed to dealing a teenager (at least I did when my kids were in their teens!); the teenager may be a minor, but he or she can make life a living hell for his/her parents by acting out in constant a test of wills. The same rule also applies to a UTMA account established for a minor in Michigan. A minor over the age of 14 years can petition the court to remove a custodian for cause and appoint a replacement custodian, which is the same right that is held by a minor when the probate court appoints a guardian for a minor under a deceased parent’s Will.  Similarly, if at least age 14 years, the minor can petition the court to compel the custodian to provide an accounting of the custodial assets or to release assets to the minor as the court ‘considers advisable.’ In short, the Act gives a 14 year old minor certain rights which can cause the UTMA custodian a lot of grief.

Legal Duty to Support: A delivery, payment or expenditure from a UTMA is in addition to, not in substitution for, nor does it affect, the legal obligation of a parent to support the minor, which may come as a surprise to some parents who think they can access the UTMA account to purchase groceries or pay for orthodontia.

Segregation: The custodial assets cannot be commingled with other assets under the custodian’s control. The custodian must manage and invest the UTMA assets following a standard of care that would be used by a ‘prudent person dealing with the property of another’ much like a trustee’s duty to invest trust assets for the sole benefit of the trust beneficiaries.

Liability: The custodial assets can be exposed to satisfy creditor claims that arise associated with the custodial assets, e.g. rental real estate is held in the UTMA. Third parties that deal with the custodian (recall that a minor cannot enter into binding contracts prior to attaining age 18 years) have recourse against the custodial assets but not the minor individually, even though the minor is the legal owner of the UTMA asset. The liability of the custodian is also limited unless he/she is personally at fault or he/she fails to disclose the custodial capacity in which he/she acts when entering into the contract on behalf of the UTMA account.

No Co-Custodians: Only one custodian can act for each UTMA account, i.e. no co-custodians , and the UTMA account can be established for only one minor. If there are multiple UTMA accounts created for the same minor, they are all treated as a single UTMA for that minor.

Reimbursement and Compensation: A custodian is entitled to reimbursement from the custodial property for reasonable expenses incurred to perform the custodian’s duties. In addition, if the custodian is not the person who transferred assets to the UTMA account to begin with, the ‘independent’ custodian can charge reasonable compensation for services performed ‘during that year.’ Restated, parents who establish a UTMA for their child cannot charge a reasonable fee for their custodial services to the UTMA account. Since the UTMA account will not be taxed as an irrevocable trust, we can expect that more expenses will be incurred in the UTMA account filing its own income tax returns each year.

Bond: A UTMA custodian is not automatically required to furnish a bond.

Transfer Tax Consequences:

Gift: The transfer of assets to a UTMA account usually qualifies for the federal gift tax annual exclusion ($15,000 per donor). Even though the minor does not have access to the transferred assets to the UTMA account, the assets are nonetheless treated as present interest annual exclusion gifts by the donor under IRC 2503(b). Anything above $15,000 will be subject to gift taxation and require the filing of a Form 709 federal gift tax return by the donor.

GST: Since the transfer of assets to the UTMA account usually qualify for the federal gift tax annual exclusion, by definition the same transfer will also qualify for the generation skipping transfer tax (GST) exemption, up to the annual exclusion amount of $15,000. The donor’s gift to the UTMA is not considered a ‘direct skip’ for the imposition of the GST tax under IRC 2613(a)(1).

Federal Estate Tax-Death of Donor: If the donor who funds the UTMA is also the custodian, and that donor dies, the assets held in the UTMA account will be taxed in the transferor’s estate for federal estate tax purposes, since the donor retained the ability to control when the transferred assets were enjoyed by the minor. [IRC 2036(a)(2).] In addition, the UTMA account assets might also be taxed in the donor’s estate under IRC 2038 or 2044, as a retained power to alter, amend or revoke the UTMA account or because the UTMA account assets could be used to discharge the parent-custodian’s legal support obligation.

  • Trick: In order to avoid this estate inclusion ‘trap’ the parent who donates property to the UTMA account, the parent should NOT be the UTMA account custodian- the other parent should be the UTMA account custodian. Along these same lines, joint property should not be used as the source of assets transferred to the UTMA account;  a ‘step-transaction’ needs to be followed, where the jointly owned asset is converted to the name of one parent, who then transfers their now separate property asset to the UTMA account where the other parent is named as the UTMA account custodian.
  • Trap: The ‘reciprocal trust doctrine’ has  been successfully applied to UTMA accounts, so if parents create UTMA accounts for the same minor at the same time, each naming the other as the custodian, it is possible for the IRS to ‘uncross’ the two gifts, to include the other spouse’s UTMA account in the decedent donor-spouse’s estate for federal estate tax calculation purposes.

Federal Estate Tax-Death of Minor: If the child for whom the UTMA account is created dies before attaining the age of distribution, the UTMA account assets are part of the minor’s taxable estate. Those UTMA account assets will pass by intestacy. Recall that since the minor is not yet age 18 years the child legally cannot create a Will, hence his/her death will cause the UTMA account assets to pass by Michigan’s intestacy law.

Conclusion: Taxing the UTMA account like an irrevocable trust will cause some additional expense for existing UTMA accounts, since there is no ‘grandfathering’ of the ‘old’ income tax rules under the 2017 Tax Act. Accordingly, in order to avoid the 37% federal income tax rate on accumulated UTMA account income in excess of $12,500, it would be wise to take a look at the investments held in an existing UTMA account and reorient those investments if the intent of the custodian is to accumulate income inside the UTMA account until the minor attains age 21 years.

Next: To follow will be a summary of the admittedly few steps that UTMA custodians (or parents) may wish to consider if the UTMA account has been successful in its investments over the years and it holds a substantial amount of wealth to be distributed to the minor nears the age of distribution.