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Perplexing problems under the Uniform Transfers to Minors Act [2010-08-11]

Paul L. Feinstein

The Uniform Transfers to Minors Act (hereinafter “UTMA”) like its predecessor, The Uniform Gifts to Minors Act (hereinafter “UGMA”) is a comprehensive statutory scheme designed to easily allow money and property to be transferred to children.  But like all statutes, disputes arise which require an examination of relevant caselaw, and such disputes have crept into family law and related proceedings.  Becoming familiar with the UTMA will help you avoid problems in settling or trying cases which involve custodial assets.

Statutory references for illustrative purposes will be to the Illinois Act, 760 ILCS 20/1 et seq., all of which sections are said in the Historical and Statutory Notes to be similar to the corresponding provisions in the Uniform Act.  One of the things you need to do is check your state to see whether the age of majority is altered.  For example, in Illinois a minor is defined as a person under 18, and a person who is 18 is of legal age for all purposes except as provided in the UTMA.  The Illinois UTMA then defines an adult as an individual who has attained the age of 21 years. 760 ILCS 20/2.  I have seen some divorce judgments which attempt to make both parties co-custodians.  Be aware that under the UTMA only one person may be the custodian. 760 ILCS 20/11. 

Note that some of these cases were decided under the earlier UGMA, but I am referencing the UTMA because the results are seldom different.  In fact, most states interpreting the UTMA use the UGMA cases as well. 

The first thing which needs to be understood is that following UTMA procedures results in an irrevocable gift to the child. In Hyder v. Hyder, 2006 WL 2864115 (Ohio App., check Ohio Supreme Court Rules for reporting of opinions and weight of legal authority, 2006) the trial court was reversed when it awarded UTMA property to the parents as marital property.  The father testified that the parties intended to put money aside for the children’s education but he was unaware that it was a UTMA account.

To avoid this problem I suggest a stipulation that certain assets are UTMA accounts which belong to the children and are not marital. But, even that appears not to be fool proof.  In Miller v. Miller, 2008 WL 3892154 (Ohio App., check Ohio Supreme Court Rules for reporting of opinions and weight of legal authority, 2008), it was held that the trial court committed reversible error when it included the value of the UTMA accounts in its division of marital assets. The trial court in Miller included the UTMA accounts as marital assets despite such a stipulation.

A significant issue under UTMA is whether donative intent is required to make a gift under the Act.  In Dally v. Bank One, Chicago, NA, 202 B.R. 724 (N.D. Illinois 1996) a Chapter 13 bankruptcy case, the court examined Illinois law which requires donative intent, transfer of dominion and control and delivery for a valid gift.  These were proper UTMA accounts belonging to the children and were deemed not to be property of the debtor or the bankruptcy estate.

All sorts of proceedings can be brought in all sorts of courts invoking the UTMA.  In Dubisky v. United States, 62 F.3d 182 (USCA 7 Cir. 1995), children brought a wrongful levy action when the IRS levied on trust accounts.  The father did not maintain records as required by the predecessor to the UTMA.  The Court concluded that the father had no donative intent and therefore there was no gift.  The children’s lawsuit for wrongful levy failed because they did not own the funds.

The Superior Court of Pennsylvania decided the important case of Sternlicht v. Sternlicht, 822 A.2d 732 (2005).  In that case a former wife brought petitions for accounting and removal of the former husband as custodian.  The father used the UTMA account to make a series of stock purchases, generated through post-separation earnings plus an inheritance.  He sold the stock and used the funds to pay private school tuition expenses of the minor child and to purchase a home for himself. He was under an order to pay the private school tuition expenses.  The trial court held that the father did not intend to give the funds to his daughter by using the UTMA account as a mere depository for stock investments.  The father claimed he was ignorant of the UTMA provision and did not believe he made a gift.  The Superior Court reversed, stating that the funds became an irrevocable gift to his daughter.  Note that expenditures for the minor’s benefit are in addition to, not in substitution for and do not affect, any obligation of a person to support the minor. 760 ILCS 20/15(c).  It was held that a custodian acts improperly if he expends UTMA funds for the purpose of fulfilling his support obligation instead of using his own income and assets where he has sufficient income and assets.  The Court therefore remanded for a hearing as to whether or not the father had sufficient funds to fulfill his support obligation without using the child’s funds.  A vigorous dissent pointed out that under common law, to make a gift intent was required and it was unfair if the UTMA eliminated the requirement of intent.  Other cases which I have mentioned below, were cited for the proposition that other states have said that following the UTMA procedures, raises only a rebuttable presumption of gift.  It was noted that this is a uniform act. Although normally out of state cases are not considered binding, the goal of a uniform act is to avoid conflicts of law and to rely on decisions of other states when they have interpreted their statute similarly. 760 ILCS 20/24 provides that “This Act shall be applied and construed to effectuate its general purpose to make uniform to the extent accepted by this state the law with respect to the subject of this Act among states enacting it.”  This case was appealed to the Supreme Court of Pennsylvania and in a case of first impression, held that the common law requirement of donative intent is not required to complete a gift to the minor under Pennsylvania

’s UTMA. 876 A.2d 904 (2005).  The Court concluded that the clear language of the UTMA demonstrated the irrevocability of a transfer regardless of donative intent.  It was pointed out that under some laws, acceptance of the gift is required.  But in the majority of the instances of a UTMA transfer, the recipient is unaware of it.  In fact, often times the recipient is an infant.  While some states have ruled to the contrary, it was pointed out that the vast majority of the states in this country have not yet addressed the issue.  A concurring opinion makes the compelling point that in the present, one while banking online could mistakenly click on the wrong link and put the funds into a child’s UTMA account.  It was also noted that the father filed a tax return in his daughter’s name where he attributed the income from sale of the stocks to his daughter.  Therefore it was pointed out that even if there was a rebuttable presumption the father had not rebutted in in this case.  So, this issue is wide open.

In In re Marriage of Jacobs, 128 Cal.App.3d 273 (Ca.App. 1982) the parties used proceeds from the sale of a house as a downpayment on a new house; the balance of the funds were used to purchase certificates of deposits in the names of the parties’ two children.  The husband then drew up and signed a back-dated note, promising to pay $130,000.00 to the children.  He prepared gift tax returns.  The husband and wife were listed as donees of the gift.  The trial court found that the husband used his financial expertise as an accountant to manipulate the parties’ money.  While he often placed the parties’ money in the children’s names to avoid taxes, the parties always treated the money as their own.  The wife’s motion to set aside the judgment was granted, finding both fraud and mistake.  The husband told the wife that as always the parties would have full use of the money in the children’s names.  The parties lacked donative intent.  Therefore the stipulation giving the husband sole control over investment of the “children’s money” essentially left the funds with the husband.  It was held that the notes did not qualify as custodial property and therefore there were no gifts under the UTMA.

In State of Ohio v. Keith, 610 N.E.2d 1017 (C.A. Ohio 1991) a criminal case, the child filed a petition to determine that a custodial bank account was hers instead of her mother’s.  Since the Court ruled that the account was the mother’s it was properly forfeited to the State under the Ohio RICO statute.  Ohio followed the rule that it must be a gift and there must be donative intent.  Under the facts in this case, no gift was intended to the daughter.  Shortly after opening the account, the mother withdrew $20,000.00 to purchase a piece of commercial property, therefore she treated the money as her own.

In In re Marriage of Agostinelli, 620 N.E.2d 1215 (Ill.App. 1993) a divorce case, the trial court ruled that custodial savings accounts were an irrevocable gift.  The father withdrew money from the son’s UTMA account to pay for the son’s hospitalization and medical expenses.  He withdrew additional money from his daughter’s account to buy a car and to pay household expenses.  The wife claimed that she was unaware of these withdrawals.  The husband also prepared tax returns on behalf of the children, claiming account interest as income of the children.  The husband testified that he established these accounts to avoid taxes.  The Court found his withdrawals improper and ordered him to return $71,000.00 to his children plus interest.  The Court also ordered the father to pay any tax liability incurred by the children.  The father unsuccessfully argued that the Court did not have jurisdiction to order him to reimburse the children because the children were nonparties to the suit.  The Court ruled that the presumption of gift was rebuttable but the husband did not rebut it.  The Court considered the tax returns for the children and also that the husband did not withdraw any money from the UTMA accounts until the parents had marital difficulties. 

In Heath v. Health, 493 N.E.2d 97 (Ill.App. 1986), the father’s children filed a petition to remove him as custodian and to render an accounting.  The husband testified that he signed signature cards, but at the instruction of the bank.  He claimed the money to establish the accounts, came from his father and was a loan.  During questioning, the husband pleaded the Fifth Amendment.  The trial court held that the father did not rebut the presumption of gift.  He was ordered removed and required to deliver up the funds.  It was noted that the Illinois UTMA provides that, following the procedures in the statute, satisfied the requirement of delivery of the gift.  However, the Act contained no provision regarding the element of donative intent.  Following the cases from other states, Illinois adopted the same rule that the presumption of gift was rebuttable.  The father’s testimony was impeached a number of times and although he claimed he did not read the signature cards, it was held that “It is a matter of common knowledge that one should always read any document before signing it.”  And the signature cards stated in capital letters, “GIFT TRANSFERRED TO MINOR”.  Also on both sides of the signature cards it indicated that the accounts were for the children as custodian and the Act was referenced.  The signature card also stated this gift of money was irrevocable.

In Gulmen v. Gulmen, 913 S.W.2d 852 (Missouri App. 1996) the parties’ adult daughter was allowed to intervene in the divorce case and the father sued on behalf of the son.  The parties’ divorce decree stated that the mother was to continue as custodian of two accounts at A.G. Edwards and the father was to remain as custodian of two similar accounts.  It was not specified in the divorce decree whether these were UTMA accounts.  The mother withdrew money from the daughter’s account.  She said that she paid all of the funds to the father for the daughter’s college education and expenses (she was obligated to contribute to these expenses).  She withdrew money from the son’s account and used some of these funds to pay back child support and to secure the release of her car which had been seized by the sheriff for nonpayment of child support.  The trial judge believed the mother’s testimony and that she was not a sophisticated business person.  So the claims for accounting were denied.  The Appellate Court reversed and ordered the mother to account for the withdrawals and expenditures.  The Court followed the other states and held that while the presumption of gift could be rebutted, the expressed recognition of the accounts in the decree was sufficient to establish a prima faciecase of gift.  The decree of dissolution established the law of the case, and therefore the mother recognized the property was subject to the terms of the Missouri UTMA.  The dissent indicated that nothing in the decree established that the custodial accounts were set up in accordance with the UTMA but infers that the majority assumed this. The dissent believed that the mother’s evidence rebutted the prima facie showing; she testified that she never saw the application forms and that the forms do not bear her signature.  Other forms, she said, were signed in blank.  She also said the A.G. Edwards people told her that she could terminate the custodial accounts whenever she wanted.

In In re Gumpher, 840 A.2d 318 (Superior Ct. Pa. 2003) the daughter filed for accounting and removal of custodian.  A minor who has reached age 14, the minor’s representative, an adult member of the minor’s family, a transferor or a transferor’s representative may petition the court for an accounting or for determination of responsibility. 760 ILCS 20/20(a).  Essentially the mother liquidated UTMA money and reimbursed herself for various expenses for the daughter’s benefit including braces, a car, a high school class trip to France, and college application fees.  The car was titled in the mother though she would later transfer it to the daughter.  The daughter did not learn of the existence of the UTMA account until after its liquidation.  Not only were the funds used for reimbursement, but some of the expenses were eight months to six years prior, therefore it could not be said the daughter received the benefit of the liquidated funds, because she had already received the benefit of the expenses paid by her mother.  It was held that all of the expenses, except the trip to France which the Court found to be a gift, were ordinary expenses typically paid for by a parent.  It was held that there could be circumstances under which the mother could demonstrate that she could have used UTMA funds but she would have to exhaust her own resources first. 

A custodian need not generally give a bond. 760 ILCS 20/16(c). But see 760 ILCS 20/19(f); it provides that a minor who has reached age 14, or an adult member of his family, can petition the court to require the custodian to give bond.  In Hoffman v. Central National Bank in Chicago, 264 N.E.2d 711 (Ill.App. 1970) a bond was required.  The action was brought on behalf of minority stock holders of the Central National Bank in Chicago.  Loans, preferential treatment and breach of fiduciary duties were claimed.  In that case, bond was required under the State’s Probate Act.

In Pope v. First of America, N.A., 699 N.E.2d 178 (Ill.App.1998) the custodian of a trust account she had opened under UTMA sued the bank for conversion.  What happened is the minor child was named Richard A. Boudreau.  Unfortunately, two days after the account was opened young Richard went to the bank, showed his driver’s license and was mistakenly given the number of an account owned by an unrelated man who also happened to be named Richard A. Boudreau.  Using that account number, the young man made nine withdrawals.  The bank learned of the mistake and asked Pope and her son to return the funds.  When that was not done, the bank seized the UTMA money as a partial set off.  Pope then sued the bank for conversion and the bank won.  The trust account deposit agreement specifically gave the bank the right of set off.  It was ruled that the money belonged to the son, but by signing the trust agreement, Pope acted on the son’s behalf and agreed to permit the bank to set off funds from this account.  Pope then made a public policy argument about protecting the financial future of minors.  It was pointed out that the Act specifically allows that the trust property is subject to tort claims. Under the Act a minor is not personally liable for a tort committed during the custodianship unless the minor is personally at fault (which was obviously the case here). 760 ILCS 20/18(c).

In Hovarth v. Craddock, 828 A.2d 1212 (Supr. Ct. Rhode Island 2003) a divorce case, the former wife filed a motion after the decree requesting an accounting.  It was filed five days before the daughter became 18.  The father stated he had exhausted the money 10 years before and he did not have documentation.  It was held that the family court did not have jurisdiction over an action brought under the UTMA because the Act in Rhode Island expressly confers jurisdiction on the probate court.  In addition, the case came up for hearing after the daughter had reached the age of majority.  Significantly, neither the property settlement agreement nor the final judgment of divorce contained reference to the custodial accounts.  Again, I suggest that any custodial accounts be specifically referenced in the judgment for dissolution, including the fact that these are irrevocable gifts belonging to the child.

Not only can custodians be held liable for misuse of custodial property, but some states have also assessed attorney’s fees.  InSartore v. Buder, 759 P.2d 785 (Colorado App.1988) the children’s custodial parent brought suit against the father for violation of fiduciary duty.  The trial court awarded damages including interest and attorney’s fees.  A little over half of the assets were in publicly traded stock and a little under half were in “penny stocks”.  The “Blue Chip stocks” had both gains and losses; almost all of the penny stocks suffered huge losses. The statutory provision for care of custodial property is to do “as would a prudent person of discretion and intelligence who is seeking a responsible income and the preservation of his capital.” 760 ILCS 20/13(b).  The trial court held that the statutorily required standard of prudence in investment was not met as to the penny stocks because they were speculative.  The trial court awarded loss of appreciation of the funds invested in the penny stock of $15,000.00, plus interest and ordered the father to pay $65,000.00 to replace all the sums expended on the penny stock investments.  Attorneys fees were also awarded. The Colorado Court of Appeals affirmed.  The father then took the case to the Supreme Court of Colorado, 774 P.2d 1383 (Colorado 1989) which affirmed.  The father’s argument was that since he also invested his own funds in the same penny stocks, he was not liable.  The Court disagreed.  The court did not find the father liable for any losses resulting from “Blue Chip” stocks.  In Colorado the UTMA actually imposed a stricter standard then the UGMA, but in either event, the father was properly held to be liable.  Noting that the court had broad discretion in fashioning an appropriate remedy, both courts were affirmed.  The father was given the penny stocks in exchange, which put him in a position he would not have enjoyed had he not been custodian. The father also claimed that neither the UGMA nor UTMA contained any provision authorizing the trial court to assess attorney’s fees.  The Court likened the case to a breach of trust and found that there was discretion to order attorney’s fees.

This reasoning was later accepted in Connecticut as well. 

In Mangiante v. Niemiec, 843 A.2d 656 (Connecticut App.2004) the daughter brought an action against the mother for breach of fiduciary duty.  There was a custodial account with approximately $4,000.00 in it.  The Judgment For Dissolution Of Marriage was again silent as to the funds placed in this account.  The mother was ordered to pay the father $75.00 a week for their daughter’s support.  The mother used the account to write checks to her ex-husband for the child support until it was exhausted.  The complaint contained counts alleging fraud, theft, embezzlement, conversion and breach of fiduciary duty.  The trial court found a fiduciary relationship existed and the mother breached it by engaging in self-dealing.  It was held that the Act explicitly provides for fiduciary powers, which means there is a fiduciary relationship.  The Appellate Court affirmed.  Thereafter, the daughter filed a motion in the trial court to recover attorney’s fees for the trial and the appeal.  The trial court exercised its equitable powers and awarded fees.  The mother appealed again. 910 A.2d 235 (Connecticut App.2006) The trial court awarded attorney’s fees in excess of the $4,000.00 that was in the custodial account.  Affirming, general law regarding attorney’s fees was discussed and the Court indicated that there were equitable policy considerations stemming from the law of trusts arising from England’s Courts of Equity.  It was noted that without the award of fees, the daughter would not be made whole because her recovery was less than the amount of the fees.  Still it is somewhat of a curious ruling because the fee award is not based on the UTMA.  It is unclear whether short of a statutory provision for fees, many other states will follow these cases; although the wisdom cannot be denied.

However, if you shoot the king you must kill the king. Baseless UTMA suits will subject you to sanctions. In Lamberton v. Lamberton, 2004 WL 2032094 (Va. App. Unpublished Opinion; Check Court Rules Before Citing, 2004) a petition seeking removal of the husband as custodian of his son’s account and an accounting was filed.  The husband consolidated the UTMA suit with a presently pending divorce action.  The motion was denied and the wife was sanctioned $8,000.00 finding that the UTMA suit was harassment where there was no evidence that the husband had done anything adverse to the children’s best interest.  The husband was also awarded fees for defending the appeal.

In Singer v. Brookman, 578 N.E.2d I (Ill.App. 1991), a child through her father’s divorce lawyers, filed a petition against their mother for an accounting and breach of fiduciary duty.  No pleadings were actually filed alleging violation of the UTMA.  The trial court dismissed on res judicata grounds, holding that the divorce case ruling was binding on the children, as the husband’s legal rights and interest in the first action, were the same as the children’s rights and interest in the instant case. The father had previously sought and received an accounting of the accounts in the divorce case and the court had found the mother had furnished all necessary documentation.  The trial court also awarded sanctions, finding that the action was unreasonable by every standard.  The Appellate Court affirmed.

Results throughout the country are unpredictable despite this Uniform Act.  But that allows the matrimonial practitioner to use his or her creativity.