Custodial Account Withdrawals under UTMA and UGMA
Under the umbrella of UTMA or UGMA statutes, the major restriction on custodial account withdrawals, made by the custodian during the management period, is that they must be made to cover costs that are above and beyond what is considered normal costs for supporting the child.
The custodian of an account under UTMA or UGMA statutes can initiate a withdrawal provided the expenses are for legitimate needs of the child. Contrary to popular belief, withdrawals are not restricted to only costs pertaining to college, but can also be expended to cover educational costs that are considered pre-college expenses. During the period of account management, reimbursements can made at any point for all costs beyond the normal cost of providing for the child.
Withdrawals can only be made by the custodian for valid costs and the child has no authority to make any withdrawals or payments from the account. In the event that the selected custodian becomes incapacitated, dies, or is unwilling to continue in the role of custodian, it is good practice to designate contingent or successor custodians to take over the role until the child reaches the age of majority or the termination date is reached.
Treatment of Unused Funds
Money in a custodial account that is considered unused is required to be dispensed to the child by the time the age of majority is reached. UGMA custodial accounts typically have an age of majority of 18 years and accounts established under UTMA generally set an age of 21 but it can be set as late as 25 years of age in some circumstances. There is no allowance to alter the account by changing beneficiaries or transferring funds to another child’s account like with Section 529 or Coverdell ESA accounts.
Transfers are Permanent
Transfers into custodial accounts for minors are permanent which means once transfers have been made to the custodial account, those funds or assets belong to the child. Consent of your child would be needed to even try to transfer the fund back again and doing so would still be a challenge because in most cases, your child won’t be of age to give legal consent for the transfer. Use of a custodial account is not wise if you have any doubts about needing to recover the assets at a later date.
The termination date for a custodial account is typically the age of majority per the statutes under either UTMA or UGMA. In some states an alternate termination date can be set at the time the custodial account is enacted but this date cannot be prior to the time the child will be 18 years or beyond the date the child will turn 25 years old.
Custodial account withdrawals under both UTMA and UGMA guidelines are fairly liberal other as long as the custodian can provide evidence that withdrawals were made in a timely manner to cover the costs beyond what would normally be required to support the child.