By Cynthia M. Clark, Esq.
The conversation usually starts like this: “I just found out that my grandmother left money for me in a 529 or UTMA account when she died fifteen years ago. When I asked my father about it, he said it was gone. He claims he spent it all on me, but he can’t or won’t provide proof of where the money went. Can you help me?”
Generally, the short answer is “Probably not.”
I explain that the father, as custodian of the 529 or UTMA account, has a legal responsibility to act as a fiduciary (to handle assets held for the benefit of someone else). And the caller, as beneficiary of the account, has a legal right to sue for his money. But litigation costs money. Lawyers and CPAs have to be hired to find out what happened to the money, so the amount in dispute has to be quite large to justify the costs involved in a lawsuit. Unless the person initiating the lawsuit has deep pockets (unlikely), there has to be a good chance of getting the “stolen” money back from the custodian (again, usually unlikely) so everyone can be paid.
And I also have to point out to the caller that suing a family member can cause irreparable damage to the relationship and cause strife within the rest of the family – which may or may not be a concern to the caller.
Years ago, when I was a financial advisor, I thought 529 and UTMA accounts were the best thing since sliced bread. They are an easy and inexpensive way to set aside money for a child or grandchild (and they may provide some tax benefits for the donor). Grandma merely goes to the bank or calls her financial advisor to set up a custodian account for Grandson. She names Dad as custodian. Dad has a fiduciary duty to prudently invest that money until Grandson reaches the age of majority or needs the money for school.
In a perfect world, that would work wonderfully.
But we don’t live in a perfect world. And as an estate planning, tax, and probate lawyer, I see the ugly reality experienced by way too many families. Parents divorce, and 529s and UTMA accounts become bargaining chips and potential slush funds for the custodian parent. Even in an intact family, times can be tough and good parents often raid their kids’ custodial accounts to keep a roof over their heads. Additionally, UTMAs and 529s can harm the ability of a child with special needs to qualify for government benefits later on.
So, while a 529 or UTMA may be appropriate when the funds involved are relatively small – a couple thousand dollars – a family member who wishes to leave large amounts of money to minors for their future use should sit down with an estate planning attorney. It may be wiser to create a revocable or irrevocable trust for the children – drafted with certain provisions that would protect those with special needs. And it may be wise to consider naming an independent trustee to manage and distribute the funds. Yes, it costs more, but you’ll know the children will have the money when they need it.
If you have questions about 529s, UTMAs, or other methods of leaving money to minors, give me a call at 941-444-5958.
Other articles you might find interesting: