One alternative to the creation of a trust for a child is to create a custodianship under the California Uniform Transfers to Minors Act (CUTMA) (Prob C §§3900-3925). The following are some questions that focus on this topic.
1. What is a CUTMA?
A CUTMA is a legal arrangement in which
property is given by a donor to an adult, the custodian, who is entrusted with
managing and expending the property for the beneficiary, who must be a minor,
until the minor reaches age. When the minor reaches age 18, the custodian transfers
all remaining property to the minor. Prob C §§3914(a), 3920.
For example, assume Donald gave $10,000
to Clarence to manage and expend for the benefit of Donald’s son, Bobby. At the
time, Bobby was age 14. Clarence then used the money for various reasons to
benefit Bobby. When Bobby turns 18, Clarence is obligated to transfer ownership
of the remaining property, if any, to Bobby.
For reference, the generic term for this
type of account is “UTMA.” “CUTMA” is used in California because a “C” is added
to the beginning to denote its California origin. So whenever you see or hear
the term “UTMA” this is basically the same arrangement as a “CUTMA” account.
Many bankers are familiar with the term “UTMA.”
2. How do I set up a CUTMA account?
Large commercial banks are readily familiar
with establishing a CUTMA account. If you look on the website of large
commercial banks such as HSBC, Bank of America, CitiBank or Chase, each will
have a description on how to set one up.
It is quite easy. If you can set up a
checking account, you can set up a CUTMA account.
3. Am I limited by the type of property
I can fund a CUTMA account with?
No, there are no longer any limits on
the types of property that may be devised to a minor under CUTMA.
See Prob C §§3901(f), 3909(a)(7).
4. When can a CUTMA account be
established?
A CUTMA account can be established during
the lifetime of the donor or at the donor’s passing by specifying for the
creation of such in the donor’s will.
5. Is a CUTMA account considered a
taxable gift?
No, CUTMA
gifts qualify for the annual gift tax exclusion under IRC §2503(b), which is
$13,000 for 2011 and is adjusted annually for inflation. Rev Proc 2009-50,
2009-45 Int Rev Bull 617.
6. What are some advantages in creating
a CUTMA account as opposed to a trust?
A CUTMA account is very ease to create.
Banks are very familiar with the process, court-supervision is not required,
bond is not required of the custodian and the custodian need not provide an
accounting to the beneficiary.
7. What are some disadvantages in
creating a CUTMA account as opposed to a trust?
Each CUTMA
account may have only one beneficiary and one custodian. Prob C §3910. Hence,
if a couple has multiple children, then a separate CUTMA account will need to
be established for each child which can cause administrative headaches.
The custodian of the account cannot be
instructed as to what investments he or she should make as in the case of a
trust. Prob C §3914(a). In particular, the custodian is free to expend the
money as they advisable and without the need to obtain court approval.
The beneficiary may incur adverse tax
liability through the “kiddie tax” if their unearned income is too high. This results
in the child being taxed at the parent’s income tax level rather than the child’s
level.
Finally, CUTMA
accounts are treated as the student's assets for financial aid purposes. 20 USC
§1087vv(f).
8. What are some alternatives to a CUTMA
account?
A donor could deliver proceeds to the
child’s parents if the amount does not exceed $5,000 and the parent promises to
use the proceeds for the child’s benefit. Prob C §§3400-3402.
If the donated property exceeds $5,000
and the child has no guardian of the estate, a court may authorize that the
money be deposited in a blocked account or may authorize the purchase of a
single-premium deferred annuity. Prob C §3413(a).
A donor could create a trust for the
child’s benefit. This would be the most flexible option available since the
trust could specify the trustee’s duties.
A court-supervised guardianship of the
child’s estate could be established to handle the child’s property. Prob C § 1510.
