The minor has a right to receive control of a custodial account at a specified age.
We’ve occasionally had a question like this one:
Years ago my parent (or other relative) set up a custodial account in my name. Now I’ve reached the age where I’m supposed to receive the money (or I’m about to reach that age) and they refuse to turn it over to me. Don’t I have a right to this money?
Reasons given by the parent or custodian for refusing to turn over the money vary, including:
- I intended this money to help you through college, and you didn’t go to college.
- I don’t think you’re ready to handle this money.
- I (the parent) need this money.
- I never meant it as a gift in the first place. I set up the account for tax purposes (or to hide money from creditors).
- I have a right to take it back because I’m your parent, or because I was the one who set up the account in the first place.
In some cases no reason at all is given. In any event, the minor for whom the account was established wants the money and feels frustrated by the custodian’s refusal to turn it over. That frustration is particularly acute when any of the following are true:
- The minor has a particular need for the money.
- The custodian is raiding the account or seems likely to do so.
- The child is stuck paying taxes on income from the account without receiving money to cover the taxes.
Minor’s right to the assets
Parents and other custodians may be distressed to learn this, but the Uniform Transfers to Minors Act is very clear in giving the minor a right to receive control these assets at the specified age (generally 18 or 21, depending on state law). A transfer under the Uniform Act “is irrevocable, and the custodial property is indefeasibly vested in the minor.” In other words, the property belongs to the minor and you can’t take it back, even if you’re the minor’s parent, or the custodian, or the person who made the transfer, or all three of these at once. If you’re the custodian, you have a legal duty to preserve the assets for the minor (except to the extent properly expended for the benefit of the minor) and to turn the assets over to the minor at the relevant age.
Even before the minor reaches the age where the account is turned over, a minor who is 14 or older has a right to see records of all transactions with respect to the custodial property. At age 14 the child also has the right to petition the court for a payment from the account, and if the court considers the payment appropriate, it can order a payment. I expect almost any court would consider it appropriate to distribute money to cover the minor’s tax liability arising from income generated in the account and would order such a distribution if called upon to do so. When the minor is under the age of 14, other appropriate individuals such as an adult member of the minor’s family can exercise these rights on the minor’s behalf.
If you’re thinking of taking money from the account for your own purposes, consider these possible consequences:
- Taking the money leaves you personally liable to be sued by the minor, or by someone acting on behalf of the minor.
- Taking the money exposes you to tax liability.
- Taking the money could have another consequence worse than the others mentioned above. Your actions could result in estrangement from a loved one. Sometimes it’s easier to cause this kind of damage than it is to repair it.
Without question there are circumstances where a custodian has reasonable moral grounds for keeping the money from the child. In many of these cases I sympathize with the custodian, especially when the goal is to preserve the money for the later benefit of a young adult who plainly lacks the maturity to handle it. If you’re in this situation, see the series of articles beginning with UTMA Regret: When Custodial Accounts Turn Sour.
Minor considerations
If you’re on the other side of this question — you’re the minor and you want to get your hands on the money, or at least prevent the custodian from taking it — you should know your legal rights. You should also consider the moral dimension of the issue.
I’ve already mentioned some of your legal rights. In addition, you have a right to petition in court for an “accounting” in which the custodian has to show how the assets were preserved or used for your benefit. If the custodian has misappropriated some or all of the custodial property, the custodian may be personally liable — in other words, may have to make up the difference. If the situation calls for removal of the custodian, you can petition for that, too. If you’re under 14, you’ll have to get an appropriate adult to file this petition on your behalf.
Before you run off to the courthouse or start threatening to sue your parents, take some time to consider the following:
- The custodian may be acting in your best interest. Hard as it may be for you to admit, you may not be ready to handle this money. Five years from now you may thank your lucky stars that your custodian refused to hand the money over. In a case like this, the best solution might be to work something out where you leave control in the hands of the custodian, but you have access to information about your assets on a regular basis and an understanding of when control will actually pass to your hands.
- Even if your custodian isn’t acting in your best interest — for example, the money is being misappropriated to other uses — think long and hard before suing a close family member, or even threatening to sue. Try to imagine how you would feel if you received such a threat. Try also to imagine how this will affect your relationship to this relative. Five years from now, what will you regret more: the loss of this money, or damage to the feelings between you and your loved ones? Be especially reluctant to sue your own parents. To use an expression from when I was your age, that’s a heavy trip.
One more tip. The financial institution has no liability for following the custodian’s instructions “in the absence of knowledge.” If you’ve reached the age when the custodianship should have ended, and you have reason to believe the custodian may drain the account rather than give you control, you may be able to delay or prevent that action by sending a letter via certified mail to the financial institution saying you are putting them on notice that any withdrawal from the account by the custodian at this point is improper. I can’t promise results, but such a letter might place at least a temporary roadblock in front of a custodian who is looking to drain the account.