Q. As a grandparent, I keep hearing about CUTMA accounts, usually in discussions about gifts to grandchildren. What are they, actually?
A. CUTMA is an abbreviation for “California Uniform Transfers to Minors Act” and, as you surmise, it refers to gifts made to minors. Minors cannot own property in their own name, as the law presumes they are incapable of managing it. As a result, the law came up with a solution, and that is to permit gifts to be made to an adult for the benefit of a minor. The gift document must specify the age at which the custodian must release the asset to the minor, which is usually age 18, but may be up to age 25, if a testamentary gift.
This form of gift is usually much simpler and less expensive than creating a formal minor’s trust, which is another option under Internal Revenue Code section 2503(c). It is also an alternative to creating a “529 Plan”, which is reserved for gifts to fund a child’s college education.
Here are some significant features about CUTMA accounts:
1) The custodian must be named in the gift instrument, and a successor custodian may also be named. It is usually best for the transferor not to name himself, so that any income earned by the gift is taxable to the minor rather than to the transferor.
2) Each gift transfer may be made only for one minor, and only one person may be the custodian.
3) Special language must be used in the transfer, such as the following:
“ I hereby transfer the sum of $30,000 to Jerry Jones, as Custodian for Barney Smith, a minor, until age 18, under the “California Uniform Transfers to Minors Act”.
If the donor wishes to delay receipt until Barney becomes 21, the following words must be added:
“…. until age 21 pursuant to California Probate Code section 3909.”
Note: if the gift is to be made by Will or Trust, the donor may extend to age 25. However, a gift which defers ownership until the minor is over age 21 will generally not qualify for the Gift Tax Annual Exclusion Amount (currently, $15,000 per year in 2018). Thus, it is often best to defer possession only to age 21, especially as to gifts made during the donor’s lifetime.
4) Assuming the Custodian is not the minor’s parent, any income earned by the gift is taxed as follows: for children or students under age 24, income below $1050/year is not taxed, income from $1,050 through $2,100 is taxed at the child’s rate, but income over $2,100 is taxed at the higher rates applicable to trusts and estates (which begin at 24% in 2018).
5) The custodian has a fiduciary duty to manage the gifted asset for the benefit of the minor, but may use the funds for the minor’s benefit without court order and without the need to take into account the parent’s duty to support the minor or the minor’s other available income or property.
6) If the minor dies before the time designated for him to receive the property, it then goes to his estate. But this may not be what the donor wanted, especially if the minor has other siblings whom the donor would then prefer to receive that gift. In that case, a gift to a trust for the minor, with provisions for successor beneficiaries in the trust instrument, may be preferable, especially in the case of a very significant gift.