Many parents or other relatives set up special accounts for minor children at financial institutions called UMTA accounts. These are a way to save for a child’s future and sometimes have tax advantages for the donor. The donor then becomes the custodian of such account. These accounts are for use of the child exclusively and must be given to the child at the age of maturity. As the donor, you are not authorized to take those funds back, even if it is an emergency or if you are displeased with the child’s decisions.
As the custodian, there is a fiduciary duty to the child. Such funds can only be used in the child’s best interest and investments should be done using the prudent investor rule. Therefore such funds cannot even be used for necessary expenses like food or shelter (as those are obligations of a parent or guardian). Further, the fiduciary is required to keep detailed accounting records and must provide those to the child upon demand, even long after the account is established. In the event that funds are wrongfully taken by the custodian, the child has recourse. As an adult the child can successfully pursue return of those funds and win in Court. Regardless of whether you believe such funds are too much for the child to handle, the minor has other problems, it is the child’s choice to use those funds.
Therefore before investing funds for a minor child, it is important to review the laws related to children’s accounts in your state.
