Reviewed or updated July 8, 2016
Here are a few more ideas for how to handle regret over setting up a custodial account for a child under the Uniform Transfers to Minors Act.
Transfer to 529 Account
If you’re mainly concerned about the impact of the custodial account on student financial aid, transferring the money to a 529 account may alleviate the problem. For detailed discussion, see UTMA Transfer to a 529 Account.
You’re not required to leave an UTMA account untouched until the child gains control. The custodian can spend money from the account for the benefit of the child. Naturally you don’t want to spend it frivolously or improperly. Most people are already spending money on their children, however. You may be able to spend those same dollars from the UTMA account. This frees up the dollars you would have spent on the child from other sources for any use you choose (including setting it aside for a later transfer, after the child settles down). I call this substituted spending. If you don’t step over the line, this is a completely legal way to shift money out of an UTMA account.
Where is the line? The spending has to be “for the use and benefit of the minor.” Those words are subject to interpretation, of course. The more aggressive you are in your interpretation, the more risk there is that you may be considered to have acted improperly. For discussion, see What Expenditures Are Proper. In any case, it’s important to keep records of how the money was spent.
Lay down the law
This is a simple, pragmatic approach that doesn’t solve all problems but may work in some situations. Simply tell your child that although he has a legal right to do whatever he wants with this account now that he’s 18 (or 21, as the case may be), you expect him to leave it alone and use it only for college, or down payment on a home, or whatever. Chances are you wouldn’t be experiencing a lot of UTMA regret if this sort of dialog would leave you feeling comfortable that you’ve solved the problem. But you may be pleasantly surprised. You don’t lose your parental authority just because the law says your kid can take the money. Apart from any strings you still hold — such as the likelihood of more money in the future — kids generally respect their parents, even if they seem loath to admit it. If your UTMA regret stems from fear that the child will waste the money, consider whether you can deal with the situation by simply forbidding unauthorized use of the account.
Get over it
You may not think much of this suggestion as a way to deal with UTMA regret, but it’s an important one to consider. Get over it. Accept the fact that the money belongs to your child, and control has passed out of your hands. Let it be a learning experience — for both of you. Imagine what your child will tell you 10 years from now. Can you see your child saying something like this?
It must have made you nervous to let me get my hands on so much money back then. But it meant a lot to me that you could trust me.