We estate planners love to use acronyms and one that comes up in planning is CUTMA which stands for California Uniform Transfers to Minors Act – California’s version of the Uniform Gifts to Minors Act. A quick explanation of what a CUTMA does is that it allows money to transfer to a minor without the need of guardianship.
A CUTMA can be used in several circumstances such as a grandparent gifting to a minor grandchild for estate tax purposes. Or a small amount of money (depending on the circumstance, the small amount can be $5,000 or less or $10,000 or less) is coming directly to a minor through a beneficiary designation on a life insurance policy or retirement account. A person’s estate plan can also instruct that a gift to a minor child be made to a particular person as custodian of a CUTMA.
A custodian is a person in a fiduciary position to manage the assets in the CUTMA account for the benefit of the minor. Who acts as custodian depends on how the account is created. If the person gifting the money is alive and is establishing the account, they can name whoever acts as custodian. If the gift is for estate tax purposes, then the person gifting the money should not act as custodian. If the gift is through an estate plan then the will or the trust creating the gift dictates who can act as custodian. If the gift is not through an estate plan and the person who is transferring the funds to the minor is not alive, then the probate code dictates who can act as custodian such as the executor of the will or the parent of the child who has custody rights.
As mentioned above, the custodian is a fiduciary and has fiduciary responsibilities to the minor in how they manage the account. A custodian’s duties and standard of care are detailed in Probate Code §3912. Any action against the custodian for breach of duty, for an accounting or for removal is brought in the probate court in the county where the minor resides if they reside in California. If the minor does not reside in California, then the venue for a court action is discussed in Probate Code §3921(b).
It is important to name a successor custodian in case something happens to the acting custodian before the minor is entitled to receive the funds. I have had to petition the probate court for the appointment of a successor custodian when the current acting custodian died and there was no successor custodian.
The account is technically owned by the minor. The minor’s social security number is used to open the account and all income is reported to them. Assuming the minor is in a lower income tax bracket than the adult gifting the funds, this can be another tax purpose for the use of a CUTMA. If a minor dies before the account is exhausted or closed, the assets in the account are distributed according to the minor’s estate plan (which they will not be able to establish until they are adults) or through intestate succession. When using CUTMAs for estate tax purposes, it is important to consider if the person making the gift to get it out of their estate is the person who would inherit the money back if the minor dies. There is always the option of utilizing a disclaimer to cure this situation.
A CUTMA terminates upon the following:
- Death of the minor;
- Between the age of 18 and 21 if the CUTMA is established by an outright gift and the age is specified in the establishing documents; or
- Between the age of 18 and 25 if the CUTMA is established by a will or trust, an exercise of power of appointment or a transfer of custodial property by a trustee.
The default termination age is 18 if not specified otherwise.
CUTMAs are a good estate planning tool and alternative to a guardianship or even a trust if the funds are not substantial.